Business Organization I Arellano University School of Law

Atty. Joanne L. Ranada 2nd Semester, SY 2013-2014

WHAT IS TRUST
Trust, like a corporation, is a creature or fiction of the law. Greta Grandmother has her lawyer prepare a legal document called a Trust. Greta then transfers Php 1M to her daughter, Debby, as trustee of the trust. Debby is required by the terms of the trust document to invest the Php 1M in a certificate of deposit and use all of the interest each year to pay for Medical school expenses for her two children, Greta's grandchildren. When the youngest of Debby's two children reaches 30 years old, Debby is instructed to divide the money in the trust equally and distribute it to each of them. The foregoing example best illustrates the time periods in a trusts' existence: 1. The trust is formed by having a legal document prepared and signed. This document is a contract between the grantor, who sets up the trust and the trustee, who administers the trust. 2. The assets are transferred to the trust. This step completes the establishment and funding of the trust. 3. The trust is administered for its duration. 4. When the trust has fulfilled its purposes, the money and assets it holds are distributed and the trust is terminated. Acc. To Bogert, a trust is a fiduciary relationship in which one person is the holder of the title to property subject to an equitable obligation to keep or use the property for the benefit of another.

History of Trust
Some writers trace the modern trust concept to the Roman Emperor Augustus who promulgated the law on fidei commissum (property in trust). Other writers say that it stems from the very base of civilization itself: under the Old Testament God appointed Moses, trustee of the people of Israel and gave him instructions to lead them out of bondage. In Egypt, 254 B.C. , an influential person named Uah, left a formally witnessed will appointing his wife executor of his estate and a friend as the guardian of his son. Wills naming executors were in use by the close of the 12th century, as shown by the will of Henry II made in 1182 wherein he named one set of executors for his property in England, another set for his property in Normandy, Main and Anjou. It was customary at first for the executor to receive the testator's assets in his own right and not until 1802 did the English courts fully recognize the executor as trustee and not owner of the assets taken over by him. During the reign of Edward I (1272-1307), executors became the recognised personal representative of the decedent. With this recognition, the probate practice came into being in England. During the Crusade (1095-mid 15th century) and the Wars of the Roses (1455 to 1487), the conveyance of property for the use became general. A crusader, upon leaving on an expedition, would convey his land to a friend for the use of his children and wife or sister. In 1535, the Statute of Uses was adopted, but this Statute did not apply to a use upon a use situation: A conveyed land to B for the use of C for the use of D. The first use was executed causing B to drop out but the second use was not executed and C found himself holding the land for the use of D. This second use came gradually to be called Trust.

Trust in the United States

The charter of the first trust institution was created in 1818. This was followed in 1896 by the creation of the Trust Company Section (now Trust Division ) of the American Bankers' Association. The US Congress authorized national bankers to enter into the trust business in 1913. The first textbook on trust was published in 1927. Trust is now one of the biggest businesses in the US with the volume running up to billions of dollars.

Business Organization I Arellano University School of Law

Atty. Joanne L. Ranada 2nd Semester, SY 2013-2014

Trust in the Philippines

On October 21, 1916, a group of enterprising Americans, realizing the need for an agency to administer and manage the properties of Americans during their early occupation and rule, founded and established the Philippine Trust Company. Other banks eventually followed suit. While the Philippine Trust Company was the first and only institution organized to engage solely in the business of trust, it branched out to commercial banking in 1921.

Trust Separates the Legal and Beneficial Ownership of an Asset

The key to suing a trust is knowing that a trust arrangement separates the legal ownership of an asset from the benefit of that asset. The person holding the legal title, the trustee, has a fiduciary duty to the person or persons entitled to the benefits of the trust property. A fiduciary duty is the responsibility of care imposed on the trustee by the provisions of the trust document and state law. The advantages of a trust arrangement come from this separation of ownership and benefit.

Five Key Elements of Every Trust

A trust is an arrangement in which a grantor transfers trust property to a trustee to hold for the benefit of the beneficiary in accordance with the purpose or intent of the trust. Every trust requires these 5 elements: 1. Grantor The grantor is the person who transfers property to the trust. He is also called the trustor, settlor or donor. The grantor generally must be the owner of the property that he or she transfers to the trust. This means that he must be of sound mind, has the legal capacity to transfer assets and must have the intent to form a trust. This intent must always be manifested. 2. Trust Property This is the principal or subject matter of the trust. It is also called the trust res. The property must be transferred to the trust which can be transferred during life, after death through the grantor's will, through a gift or by the exercise of a power of appointment. The property of a trust can be cash you contribute, life insurance policy, stock in a corporation, or any other asset that serves your purposes for establishing the trust and that can be owned in a trust. In most trusts, a formal legal description of the trust property is attached to the end of the trust as a schedule. 3. Trustee The trustee is the person responsible for managing and administering a trust. The trustee should make a declaration, often by signing the trust agreement that he or she accepts the trust property as trustee. It is an accepted practice that the trustee names a second person to serve as co-trustee. The main legal requirement to serve as trustee is that the trustee have the legal capacity to accept title (ownership) of the trust property. The trustee generally will hold legal title to the assets in the trust but not beneficial title. Legal title means the trust assets are owned in the name of the trustee, the trustee has specific duties and responsibilities for the trust property. Beneficial title is held by the beneficiaries of the trust.
Example: Tom Thumb established a trust for the benefit of his children. Tina Fey is named the trustee. The stock that Tom transfers is owned by Tina, as trustee of the trust. This, Tina holds legal title to the stock in trust for the beneficiaries. Beneficial title, however, is held by the children and only they have the right to benefit from the dividends and principal value of the stock.

Note: The above example indicates why the same person cannot be the only trustee and the only beneficiary. There would be no split of legal and beneficial title, which is essential for a trust. If the legal and beneficial

Business Organization I Arellano University School of Law

Atty. Joanne L. Ranada 2nd Semester, SY 2013-2014

interests merge, or become one by law, the trust could be invalidated. 4. Beneficiary The beneficiary is the person/s who will receive the benefits and advantages of the property transferred to the trust. It is important that the persons who are beneficiaries can be determined, meaning, the description should be clear and certain. If you name my descendants as beneficiaries, there must be a time for making the determination of who your descendants are, otherwise, it is impossible to know when to make the decision. Beneficiaries can also be charities. 5. Intent of Trust Every trust has a purpose or intent which motivates the grantor to set up the trust in the first place. Apart from the obvious requirement that the intent must be legal, there are few restrictions on what the trust should be for. The intent can relate to benefiting a particular beneficiary or achieving certain tax benefits or providing for the management of certain assets. The intent of the trust should be spelled out in detail in the trust document.

Parties to the Trust:

1. Trustor/creator/settlor/grantor/donor (trustor-beneficiary) 2. Trustee 3. Beneficiary/cestui que trust/cestui que trustent

How Do Trusts Compare to Other Legal Arrangements?

TRUST Property is an element Legal title is with the bank Own name of the bank Death does not terminate the account AGENCY Property is not an element Legal title is with the client Executed in the name of the client Death extinguishes the agency

TRUST Not insured by PDIC Covered by Sec. 55.1 (b) RA 8791 No guarantee/fixity Relates to specific property Conveyance TRUST Covers real and personal property Legal title is transferred Equitable rights Fiduciary relations

CASA (depositor accounts) Insured by PDIC Covered by RA 1405 (Secrecy of Bank Deposits) Principal and interest are guaranteed Obligation is to repay Contract Bailment Covers only personal property Legal title is retained Legal rights Not a fiduciary relation

Business Organization I Arellano University School of Law

Atty. Joanne L. Ranada 2nd Semester, SY 2013-2014

Different Types of Trust

It is important to categorize trusts in order to explain their uses and more importantly, so you can pick the most suitable one for you. 1. When Established You can set up a trust during your lifetime (intervivos trust). Common living trusts include a revocable living trust (also called a loving trust), a charitable remainder trust, and a children's trust. You can also establish a trust that only becomes effective on your death (testamentary trust). 2. Type of Beneficiary Trusts can be established to benefit any type of person or cause. For example, a living trust is an excellent tool for planning for your own disability. In a living trust, you are the beneficiary. Several different trusts can also be set up for your spouse, children or charity. 3. Grantor's Control When the grantor retains the right to terminate or change a trust, the trust is called revocable. Living t rusts are the most common examples of revocable trusts. When the grantor relinquishes the right to change or terminate the trust, it is said to be irrevocable. When tax considerations or assets protection are important, the trust is more likely to be irrevocable. 4. Assets Held This may include insurance, real estate or stocks. Voting trusts can also be used to hold stock of a closely held corporation. 5. Powers of Trustees Trustees can be given the power to appoint the assets of the trust, to pay the income of the trust to a single beneficiary or accumulate the income or to sprinkle the income among various beneficiaries. For example, where the trustee can allocate income to various beneficiaries, the trust is called a sprinkle trust. 6. Powers of Beneficiaries Although the beneficiaries are often passive and the trustees make most decisions, there are several powers that the beneficiaries can be afforded. For example, the beneficiaries may be given the right to require the distribution of certain amounts of principal each year from the trust.

Duties of the Trustee

(adaptation from Complete Guide to Trust Accounting and Trust Income Taxation, J.G.Denhardt, Jr.)

After the trustee has accepted the trust and qualified by taking an oath, giving bond and taken any other steps required by law or the trust instrument, he has a duty to examine the trust terms to ascertain the property comprising its subject matter, the identity of the beneficiaries, and his when duties as trustee. A person is of course not bound to accept any trust but once he accepts, he has the duty to administer the same. 1. Obtaining the Property The trustee has the duty to take tangible real and personal property into his possession and to take the steps necessary to secure the ownership papers thereof such as TCT, CCT, stock certificates and the like. As part of his duty to assume control over the assets, the trustee has the duty to collect notes, bonds, check or to sue for replevin or other contract or tort claims which are part of the trust estate. 2. Caring for the Assets A trustee must use reasonable care and prudence in caring for the trust assets. He must see that deeds are

Business Organization I Arellano University School of Law

Atty. Joanne L. Ranada 2nd Semester, SY 2013-2014

recorded, carry adequate insurance on insurable property and the like. 3. Management of the Assets A trustee must see to it that his investments are within the legal list of permissible investments. He has the responsibility to make the trust property produce income. 4. Loyalty to the Beneficiaries Undivided loyalty is absolutely required and the penalties visited upon the disloyal trustee can be uncommonly severe. The trust must be administered solely for the benefit of the beneficiaries and the trustee is not permitted to take any position which could conceivably be adverse to theirs. The trustees must never obtain any personal advantage at the expense of the trust estate. Self-interest rules are so strict that a corporate trustee cannot invest trust funds in its own stock, for example. Most Fundamental Duty: Loyalty to beneficiaries. Steer away from self-dealing transactions and self-serving transactions. 5. Use of Discretion The trustee is generally considered to have discretion as to whether or not to use his powers of discretion. If, however, the trustee is required to take certain actions, he has no discretion at all and must exercise the power conferred. If he fails or refuses to exercise his discretion, the court may direct him to do so. 6. Delegation of Authority A grantor chooses a trustee because of confidence in his judgment and integrity. From this premise evolved the rule that a trustee cannot delegate the performance of his trust duties unless the grantor expressly provides that the trustee may delegate the powers. Exception: the trust may delegate the authority to perform a purely mechanical or ministerial act but a rather high standard of prudence is required in the selection of employees and agents.

Methods of Creating a Trust

1. Declaration by a property owner that he holds the property in trust for another or procuring such a declaration by another (ex. Common trust fund establishment, Declaration of Trust, etc); 2. A transfer by the owner of that property by deed or will, to another to hold in trust (ex. Living trust or inter vivos trust, testamentary trust); 3. Making or procuring to be made, a contract to pay money or deliver property to another which the payee or transferee is to hold in trust for a third person (ex. Insurance trust, pre-need memorial plan coverage).

Essential Requirements:
1. 2. 3. 4. 5. Capacity of Settlor Intent of Trust (certainty in words, action or intention or certainty as to subject matter and objects) Consideration Transfer of Property Acceptance by Trustee and Beneficiary Acceptance by Trustee It is not necessary to the creation of trust unless the trust was intended to be personal (1445, NCC). Maxim: Equity will not allow a trust to fail for want of a trustee.

Business Organization I Arellano University School of Law

Atty. Joanne L. Ranada 2nd Semester, SY 2013-2014

Acceptance by Beneficiary This is always necessary. Nevertheless, if the trust imposes no onerous condition upon the beneficiary, his acceptance shall be presumed if there is no proof to the contrary (1446, NCC). But in order that the named beneficiary may be the owner of an equitable interest in the trust property and the holder of an equitable claim against the trustee, the beneficiary's acceptance must be shown. Trust cannot be forced on the beneficiary without his approval. The beneficiary must accept within reasonable time after he is notified of the settlors actions of the trust creation.

The Prudent Man Rule

Sec. 80 Conduct of Trust Business. A trust entity shall administer the funds or property under its custody with the diligence that a prudent man would exercise in the conduct of an enterprise of a like character and with similar aims (General Banking Law of 2000) Qualities: 1. The element of initiative or effort includes such acts as seeking qualified professional assistance where necessary for proper and efficient administration of trust; 2. Element of skill or judgment: The existence of a higher skill imposes a duty to exercises it; 3. Trustee is in accord with this rule and is not responsible for error in judgment.

Specific Modes of Termination

1. Revocation The settlor has no power to revoke the trust and secure the return of the trust property to him, unles he expressly reserved such a power, except where the settlor is also the sole beneficiary (Sec. 148, Bogert) 2. Recission or Reformation If the settlor directed that a power of revocation be inserted, but this was not done due to mistake or fraud on the part of the person preparing the instrument, he may have the instrument reformed to include power of revocation. 3. Expiration of the Period The length of time for which the trust is to continue is usually fixed expressly in the trust instrument and the trust ends when this period expires (Sec. 148, Bogert). If the instrument does not expressly fiz the duration, it will be deemed to have been intended that the trust lasts until the settlor's purposes have been accomplished. 4. Accomplishment of Purpose or Impossibility of Accomplishment If the purpose of a private trust becomes accomplished before the date for normal termination of the trust, equity will consider the trust terminated, either because of the application of the Statute of Uses to a passive trust, or because equity will not complete the useless act of holding the property for a longer period ( Sec. 150, Bogert) If it becomes impossible or illegal to accomplish the purposes of the settlor at a time before the normal date for trust termination, the court will terminate the trust or consider it terminated in the case of a private trust. (Sec. 150 par. 2 Ibid) 5. Consent of Beneficiaries Where the settlor and all the beneficiaries of a trust join in applying to the court for termination of the trust, it will be ended even though the purposes which the settlor originally had in mind have not been accomplished. (Sec. 152, Bogert).

Business Organization I Arellano University School of Law

Atty. Joanne L. Ranada 2nd Semester, SY 2013-2014

6. Merger of Obligations Where after the trust has been created, the interests of all beneficiaries pass by operation of law or by conveyance to the trustee, the equitable and legal interests merge, no purpose of the settlor can thereafter be accomplished through the trust and it terminates. (Sec. 151, Bogert)

Consequence of Termination
The trustee has the power and duty to retain possession of the trust property, safeguard and manage it and to perform such other acts as are reasonably necessary to the winding up of the trust affairs: to prepare his accounting, distribute trust property and secure his discharge.

Mechanisms for Trustee Protection

1. Affirmative conducts which bars the beneficiary: a. Consent b. Ratification c. Release d. Estoppel e. Election 2. Negative conduct which bars beneficiary: a. Laches b. Statute of Limitations 3. Affirmative conduct of trustee: a. Exculpatory and immunity clauses b. Instruction

Remedies of Aggrieved Beneficiaries: 1. 2. 3. 4. 5. 6. 7. 8. 9. Accounting Damages Criminal action for estafa Recover on the bond for faithful performance of trust duties Equitable lien on the product of breach Information and inspection of trust records Injunction or settling aside of wrongful acts Specific performance Tracing of trust property 10. Removal of trustee