Hack you can trust
Every estate should have a will and is likely to have at least one trust. The issue is which vehicle you will use to transfer your assets to your loved ones.
Published in Daily Tribune on June 9, 2022
by: Jose Roger O. Arroz
Misconceptions tend to keep us averse to entertaining novel ideas and solutions that are as effectual as the usual choices, if not more. In estate planning, one such misconception is that the only way to prepare for the eventual transfer of properties upon one’s death is through a “will.”
The New Civil Code defines a will as an act whereby a person is permitted, following formalities prescribed by law, to control to a certain degree the disposition of his estate, to take effect after his death. It is a written representation of one’s desires and wishes to be executed when the testator is “out of the picture.”
Despite its popularity, the execution of a will comes with some downsides. Foremost of which, is the inevitability of going through a court proceeding for its probate. This is the process of proving the will’s extrinsic and intrinsic validity. This often becomes a public spectacle which makes it susceptible to intrigues. Often, the process ends up becoming a protracted and costly exercise for the heirs.
Now, is there a hack for effectively passing on property after death while enduring the disadvantages of a will? An underrated tool that can complement the execution of a will is establishing a “trust.” It is a legal instrument or device whereby a person called a trustor conveys properties to another person called a trustee, who shall administer and manage the properties for the benefit of a designated person called the beneficiary. The term “person” may refer to either a natural person or a juridical person like a corporation. Each party has obligations and rights involving properties and property interests to address various purposes.
An Express Trust, under Philippine law, is established by the manifest intention of the trustor or of the trustees. Hence, a trust arrangement is perfected by the mere agreement of the parties.
This results in the creation of a separate juridical entity in which the different facets of ownership of the properties contributed to the trust are split among the parties. The legal title to the property is reposed in the trustee while the equitable title or beneficial interest rests in the beneficiary.
The legal rights 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.
Generally, there are two types of trust arrangements in the Philippines. First is a “revocable trust,” which is ideal for those who wish to retain significant control over the trust, including the power to designate or remove beneficiaries, to amend or modify its terms and conditions, or to revoke the trust altogether. This type of trust also allows the trustor to enjoy the properties under trust and the income therefrom and be designated as beneficiaries. Accordingly, a property under a revocable trust remains to be part of the trustor’s estate and, thus, is subject to estate taxes.
Second, an “irrevocable trust” is where the trustor fully relinquishes control over the trust after its perfection. Hence, said trustor can no longer change the beneficiaries and stipulations, nor become a beneficiary of the same trust. In essence, property contributed to an irrevocable trust is carved out of the estate of the trustor. This effectively reduces the taxable estate of the trustor which translates to a lower estate tax liability. However, such transfer is deemed a donation, thus subject to donor’s tax.
Every estate should have a will and is likely to have at least one trust. The issue is which vehicle you will use to transfer your assets to your loved ones. It is always best to consult your estate planner or attorney to determine which fits best with your estate and your goals for cost, efficiency, privacy, and more. In sum, it is reassuring that when it comes to doing this, there is another hack we can Trust.
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Atty. Jose Roger O. Arroz, MBA, is a Junior Associate at Aranas Cruz Araneta Parker & Faustino Law Offices. JR obtained his Juris Doctor degree from the University of St. La Salle in 2021. While in law school, he worked as an account manager for one of the top banks in the Philippines, handling trusts, investment management, and other fiduciary arrangements for high net worth and corporate clients. Prior to pursuing his law degree, he also earned a Master’s Degree in Business Administration from the same university, where he graduated top of his class, as a working student.
