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BASIC TRUST CONCEPTS

I. What is a trust?

Trust is a legal instrument or device whereby a person called a Trustor delivers part
or all of his properties to another person called Trustee who administer and manages
the property/ies for the benefit of designated person/s called Beneficiaries.

It is a transaction usually composed of three parties (trustor, trustee and


beneficiaries), each with his own obligations and rights, and involving properties and
property interests to address various kinds of purposes.

One of the most notable feature of Trust is grounded on the fact that the legal title to
the property is in one person while the beneficial interest is in another person. The
legal right of ownership and control are in the trustee, subject to the duty of applying
and using the property as directed by the trustor, while the right to enjoy the benefits
from the property is in the beneficiary of the trust. The Trustor may dictate the terms
and conditions as to the release of benefits to the beneficiaries.

II. Who are the parties to a trust

1. The trustor or grantor – the owner or the person giving the property in trust, who
should have the legal capacity to effectively transfer property outright by gift,
assignment, exchange or sale.

2. The trustee – the person or institution in whom the confidence is reposed as


regards the management of a property for the benefit of another person. The
trustee may either be a natural person or a corporation or an institution. The most
common institutional trustees are banks and other BSP trust accredited
institutions.

3. The beneficiary – the person who is to receive the benefits from the trust or for
whose benefit the trust has been created and is sufficiently identified as such.
The beneficiary may be the trustor himself or persons other than the trustor, as
for example, the trustor’s children or an institution like a foundation.

III. Responsibilities of a Trustee

1. Fidelity to the trustor’s interest;


2. Compliance with trustor’s instructions and with the terms of trustor’s agreement
with the trustee;
3. Full disclosure of the details of trustor’s investments;
4. Separation of trustor’s money from the business of the bank and from the money
of its other clients, except in the case of Common Trust Funds where participants
become proportionate owners of a pool of investments;
5. Execution of all investments at the best possible prices and at the least
transaction costs;
6. Scrupulous care, safety and prudent management of trustor’s assets;
7. Confidentiality about trustor’s financial affairs.

IV. Types of Family Trust

1. Irrevocable Trust – Once the Trustor enters in to an irrevocable trust, the assets
placed in the trust are no longer part of the Trustor’s estate as it will be deemed
that such as assets were already donated to the TrusteeSince it is no longer part
of the Trustor’s Estate, such asset will no longer be subject to probate
proceedings and will no longer be subject to estate taxes.

On the other hand, there are quite a handful of disadvantages in an Irrevocable


Trust. Since the transfer of the property is considered as a donation, such act
shall be subject to Donor’s Tax. Also, once the donation has been done, the
Trustor loses its ownership and control over that property forever. The Trustor
must be careful not to impair the legitimes (or the assets reserved for the heirs) in
case of a will.

Also, the Trustor also cannot change his beneficiaries in an irrevocable trust. The
trustor cannot amend the terms and conditions of the trust, as well as cannot
make himself as beneficiary.

2. Revocable Trust – In contrast to irrevocable, here, the assets placed in the trust
are still part of the Trustor’s estate, thus it will be subject to estate taxes once the
Trustor dies and will still be subject of probate proceedings if the Trustor has left
a will.. However, the control and ownership of the property remains with the
Trustor. He can also change the beneficiaries, the terms and conditions of the
trust pertaining to the distribution of benefits to the beneficiary, and the Trustor
can designate himself as beneficiary..

V. What is a 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.

It still has still the three parties, the Trustor, Trustee and Beneficiaries. The Trustor
(sometimes referred to as the settlor or the creator) is the person who creates the
Family Trust; the Trustee (which can be the Trustor), is the person who is
responsible for managing the Family Trust assets and carrying out the Family Trust’s
objectives; and the beneficiary (who can also be the Trustor) is the party for whom
the Family Trust was created.

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 Trustor’s children and then distributed to
grandchildren.

VI. What are the uses of a Family Trust?

1. Elimination of Probate Proceedings. Typically, a Family Trust is created to avoid


probate (or the court process required for the enforcement of a will). Probate
results in 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 beneficiaries of the estate.

2. Asset Management. Managing one’s 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.

3. Asset Protection. Through Family Trust, the assets can be protected and
transferred from one generation to another as desired by the trustors.