Business Organizations I

Arellano University School of Law

Atty. Joanne L. Ranada

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.

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.
th

During the Crusades (1095-mid 15 century) and the

War of the Roses (1455 to 1487), the conveyance of
property for the use of 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.

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
th
the 12 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

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.

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Atty. Joanne L. Ranada

(ownership) of the trust property.

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 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 interests merge, or become one
by law, the trust could be invalidated.
4. Beneficiary

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

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 (trustorbeneficiary)
2. Trustee
3. Beneficiary/cestui que trust/cestui que
trustent

Business Organizations I
Arellano University School of Law

Atty. Joanne L. Ranada

How Do Trusts Compare to Other Legal

Arrangements?
TRUST

AGENCY

Property is an element

Property is not an element

Legal title is with the bank Legal title is with the client
Own name of the bank

Executed in the name of

the client

Death does not terminate

the account

Death extinguishes the

agency

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
trusts 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

TRUST

CASA
(depositor accounts)

Not insured by PDIC

Insured by PDIC

Covered by Sec. 55.1 (b)

RA 8791

Covered by RA 1405
(Secrecy of Bank Deposits)

No guarantee/fixity

Principal and interest are

guaranteed

Relates to specific
property

Obligation is to repay

Conveyance

Contract

TRUST

Bailment

Covers real and personal

property

Covers only personal

property

Legal title is transferred

Legal title is retained

Equitable rights

Legal rights

Fiduciary relations

Not a fiduciary relation

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,

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,

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Arellano University School of Law

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 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 selfserving transactions.
5. Use of Discretion

Atty. Joanne L. Ranada

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. Capacity of Settlor
2. Intent of Trust (certainty in words, action or
intention or certainty as to subject matter and
objects)
3. Consideration
4. Transfer of Property
5. 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.
Acceptance by Beneficiary

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

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)

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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)

Atty. Joanne L. Ranada

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).
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
beneficiary:
a. Consent
b. Ratification
c. Release
d. Estoppel
e. Election

which

bars

the

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.
10.

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
Removal of trustee

Business Organizations I
Arellano University School of Law

Atty. Joanne L. Ranada