Estate planning is a crucial aspect of securing the future for your loved ones. Traditionally, wills have been the primary tool for dictating asset distribution. However, an increasingly popular and versatile alternative to wills is the establishment of a trust. Trusts are an excellent estate device, capable of accomplishing much more than other tools used in the construction of an estate plan.
What is a “trust”?
It is a legal arrangement whereby a person transfers his legal title to property to another to be administered by the latter for the benefit of a third party. It is a right of property held by one party for the benefit of another.
Who are the persons involved in the creation of trust?
Generally, at least three (3) people are needed:
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- The trustor (creator/settlor/grantor) or the person who intentionally creates or establishes the trust. He transfers legal ownership of property to a person for the benefit of a third party, who owns the equitable little;
- The trustee or the person who takes and holds the legal title to the property in trust solely for the benefit of another, with certain powers and subject to certain duties; and
- The beneficiary or cestui que trust or the person who has the equitable title or interest in the property and enjoys the benefit of the administration of the trust by the trustee.
What are some advantages of a trust as a succession planning tool?
- Less burdensome compared to Wills. Last Will and Testament has to be probated or have its legal validity recognized before a court. Because a probate proceeding is a judicial process in our jurisdiction, it will require lawyer’s fees and may result in considerable delays in the distribution of the benefit to the heirs.
- Trustor’s assets will be managed according to his wishes. Provisions can include defining at what age each beneficiary will receive their share of the assets. On occasions, interests can be split, for example, stipulating that income from the trust will go to family beneficiaries during their lifetime and to a defined charity after their death.
- When used for wealth transition, assets held in trust can be distributed more quickly at death, if the deed permits, because they are generally not treated as part of a decedent’s estate or patrimony, and therefore do not require the appointment of an executor or court proceeding to marshal, manage and distribute the assets. This is particularly useful if there is volatility in the market where a delay could result in a loss of value to the beneficiaries or heirs.
- Trusts can also provide a good degree of flexibility – for example, a trustee can decide to delay a distribution.
What is a revocable trust?
It is one which can be revoked or cancelled by the trustor or another individual given the power. It 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.
What is an irrevocable trust?
One which may not be terminated during the specified term of the trust.
Note: Whether a trust is revocable or irrevocable depends on the wordings or language used in the creation of the trust. It will be presumed revocable unless the creator has expressed a contrary intention in the trust deed.
What is the tax implication of revocable trust? How about an Irrevocable trust?
Assets transferred to a Revocable Trust are still considered assets of the Trustor, such that upon the Trustor’s demise, the assets in a Revocable Trust will still be subject to 6% estate tax.
In an Irrevocable Trust, as long as the title to the assets is in the name of the appointed Trustee, estate tax will not apply even if any of the beneficiaries passes away since none of the latter own any assets in the Trust. This means that several generations of estate tax can be saved for as long as the corpus of the assets remain in the Irrevocable Trust. This benefit is not present in a Revocable Trust arrangement as assets from a Revocable Trust are distributed to beneficiaries upon the death of the Trustor.
When composing a trust agreement, what provisions are typically essential to include?
- Identification: Clearly state the trustor, trustee, and beneficiaries.
- Property Inventory: Detailed inventory of all the properties to be included in the trust.
- Beneficiary Rights: Rights of the beneficiaries over the trust assets.
- Trustee Duties and Powers: Outline the responsibilities and powers of the trustee.
- Revocable/Irrevocable Trust: Decide whether the trust will be revocable (modifiable during your lifetime) or irrevocable (cannot be modified or revoked once established).
- Terms and Conditions: Specify the conditions for asset management and distribution.
Trusts offer a versatile and efficient means of estate planning, providing control, flexibility, and potential tax advantages. Consulting legal professionals when establishing a trust ensures that your intentions are accurately and legally documented, securing your legacy for generations to come.
Source:
The New Civil Code
De Leon, H. (2010). Comments and Cases on Partnership, Agency, and Trusts (8th Edition). Rex Bookstore
Riego, J. (2022, November 28). A question of trust: Revocable or irrevocable?
Parets, M. (2022, November 15). Are trusts on your radar for succession planning?
