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TYPES OF TRUSTS IN THE

PHILIPPINES
There are many types of trusts that can be used to accomplish a variety of
objectives. In the Philippines the four main types of trusts that are most
useful are the family trust, the assets protection trust, the insurance trust
and the business trust. The following is an overview these trusts.
FAMILY TRUST:
A Family Trust is an exceptionally useful device that can give considerable
flexibility to estate planning and may save money at the same time.
Typically, a Family Trust is created to avoid probate, provide asset
management and in some cases, asset protection.
The three parties to the Family Trust are the grantor, trustee and
beneficiary.
The grantor (sometimes referred to as the settlor or the creator) is the
person who creates the Family Trust; the Trustee (which can be the
grantor), is the person who is responsible for managing the Family Trust
assets and carrying out the Family Trusts objectives; and the
beneficiary(who can also be the grantor) is the party for whom the Family
Trust was created.
In the case of the typical Family Trust, the grantor would name himself or
herself as the income beneficiary, sometimes as the trustee, while their
heirs are named as the remainder beneficiaries.
One big advantage of a Family Trust is that it can protect the grantor by
allowing the grantor to appoint a co-trustee or to provide for a successor
trustee to manage the Trusts investments in the event of incapacity .

Managing ones own property while you are well and vigorous may be the
most attractive option for most individuals. However, how do you ensure
continuity in the management of your assets if illness or injury were to
strike, leaving you unable to continue the management your assets. This
question is answered by having a family trust that continues to manage
trust assets and most often avoid the need for a guardianship.
Another advantage of a Family Trust is avoidance of probate. If you own
property in your own name such as real estate, bank accounts, etc., in the
Philippines, the U.S. or elsewhere in the world, these assets will be subject
to probate.
This represents extra cost and delay to settle your estate. Fortunately, a
probate proceeding would not be required where these assets are held by
a Family Trust. This, in turn, reduces the expense to settle the trust estate
and delays in distributing assets to distributees of the estate.
The Family Trust can be designed to distribute assets directly to
beneficiaries or to continue to hold these assets in trust for the beneficiaries
for a stated period of time or the life of the beneficiary.
A common feature of many Family Trusts is for the assets to be held for the
life of the grantor, then for the life of the grantors children and then
distributed to grandchildren.
If the grantor so desires, the children could be giving the power to have the
trust assets to continue be held in trust for their children.
ASSET PROTECTION TRUSTS:
Asset protection Trusts come in many forms.
They can be domestic or foreign, self-settle or third-party trust. All are
irrevocable.

It is the language used in the drafting of the trust that gives it the asset
protection feature.
Typically the trust will contain a spendthrift clause and a discretionary
clause for distribution of income and/or principal, plus additional provisions
that will make it difficult for a creditor to reach the trusts income and
corpus.
This type of trust is popular with individuals that wish to protect themselves
or their children from creditors, lawsuits, claims of ex-spouses and just
plain bad judgement or luck.
For business persons, an asset protection trust is often used to protect their
personal assets from business debt or a business deal gone bad.
In the case of the grantors children, an asset protection trust is most often
used to protect their children from the three Ds divorce, death, and
disaster.
Two important clauses to include in an asset protection trust are the
spendthrift clause and the discretionary distribution clause.
The spendthrift clause does not limit the beneficiary rights to income and/or
principal, pursuant to the terms of the trust agreement, but it does explicitly
prevent the trust beneficiary from assigning the future payments of income
or distributions of principal.
Because beneficiaries cant assign their interest in trust income and assets,
creditors are prohibited from reaching the trusts income and/or principal.
The discretionary distribution clause protects trust assets by giving the
beneficiary no direct rights in the trust income or assets that can be
assigned or attached.

Distributions from the trust are subject to the sole discretion of a trustee to
or not distribute income and/or principal.
The protection from creditors claims afforded by the discretionary clause
derives from the widely recognized rule of law, that where a beneficiary has
no right to compel distribution, a creditor has no right to compel a
distribution of the beneficiarys interest in the trust.
One way to look at an asset protection trust, is to think it as an insurance
policy.
There are many types of insurance you can buy:
But you cant buy insurance to protect your assets from such events as a
business deal gone bad, just plain bad luck, claims of creditors that exceed
your liability insurance coverage and ex-spouses. No matter how careful
you are, events beyond your control can expose your assets to claims that
can wipe you out financially.
An asset protection trust may not prevent the claim against you, but it can
prevent a creditor from taking the assets held by your asset protection trust
to satisfy the creditors claim.
LIFE INSURANCE TRUST:
Under U.S. tax law if you own, have an interest in, or control over an life
insurance policy, the death proceeds of the policy are subject to estate
taxes.
Philippine tax law is a little more liberal.
Under Philippine estate tax rules, life insurance proceeds are included in
the taxable estate to the extent of the amount receivable by the estate of
the deceased, his executor, or administrator, as insurance under policies
taken out by the decedent upon his own life, irrespective of whether or not

the insured retained the power of revocation, or to the extent of the amount
receivable by any beneficiary designated in the policy of insurance, except
when it is expressly stipulated that the designation for the beneficiary is
irrevocable.
A popular planning technique to avoid life insurance proceeds from being
subject to estate taxes is to have a trust own the life insurance policy that
receives life insurance proceeds upon the death of the insured.
This removes the life insurance proceeds from the deceased insureds
taxable estate and can be extremely useful planning technique for
providing estate liquidity
For example, assume an estate consists mainly of assets of a family
business, such as land, buildings, equipment, etc. that are necessary to
continue the family business.
Not all of the decedents children are interested in being part of the family
business.
An insurance trust could be designed to provide the cash to buy out the
children not interested in the business, while the children interested in the
business receive the business assets.
Typically, the children that want to continue the business are the
beneficiaries of the insurance trust.
Upon the insureds death, the insurance trust would receive the insurance
proceeds, which would be used to buy the business assets from the estate
(which could be a family trust).
The end result, the children that want to run the family business will own
the business assets in trust (think asset protection) for their benefit, which
they can continue to use in the business, while the children not interested
in the business would receive cash.

This technique can also be used to provide a surviving spouse with cash,
while the children get the property.
There are many variations of how an insurance trust can be used to
provide liquidity for business succession planning or the needs of heirs.
BUSINESS TRUST:
All trusts that hold assets are in a sense, a business trust due to the
management and investment of trust assets.
However, some trusts are specifically designed to create or acquire a
business. Whatever the purpose, business trusts have been around long
before corporations became the common business entity format.
Trusts were being used prior to 1571 when the Statute of Elizabeth was
passed in England.
The Statute of Elizabeth forms the basis of much of the trust law found
around the world in English speaking countries today.
In New York, large sections of New Yorks trust law is taken word for word
from the Statute of Elizabeth. So, it can be said,Trusts are not the new kid
on the bloc
The business trust made its debut in Massachusetts, USA, in 1827. As a
result, many business trusts are referred to as a Massachusetts Trust.
The U.S. Supreme Court has defined the Massachusetts Trust as a form of
business organization where property is conveyed to the trustee in
accordance with the terms of the trust agreement, to be managed for the
beneficiaries of the trust.
In essence, a business trust is your typical trust with a different label
identifying it as a business trust due to its main purpose to carry on a
business.

The business trust originated in Massachusetts as a result of negative laws


prohibiting the development of real estate without a special act (permission)
of the State.
As the laws became more liberal and it was easier to form a corporation,
the corporation replaced the business trust as the business entity of choice
for most business, but not all.
For example, many mutual funds, money market accounts, IRAs are
operated as trusts.
It is also common for family business assets to be held in trust and leased
to the family members operating the business.
In the Philippines, the business trust is a useful vehicle that allows a group
of individuals to pool their money to start or acquire a business similar to
the partnership or corporate format for pooling money for an investment.
However, the business trust is still a trust with the features associated with
trusts in general.
As in the days of old, before corporations became the common business
entity, business trusts can still be an effective means of conducting a
business.
IN CONCLUSION:
Trusts are a very flexible planning tool that offers many benefits ranging
from asset protection, avoidance of probate, reduction of taxes, to mention
a few of the many benefits offered by trusts.