Conclusion

BANK IRREVOCABLE living trusts accept only cash, but you can place any kind of asset in an expanded irrevocable living trust—real estate, cash, stock, bonds, works of art. The requirement is that it has monetary value.

Common sense is required, though. Theoretically, anything can be converted to cash, but not all of your personal property is appropriate for inclusion in a trust. Unless your car is a certified antique which will fetch hundreds of thousands of dollars on the antique car market, do not place your beloved but rusty old chariot into the trust, or that piece of costume jewelry that has sentimental value for you because it was your husband’s first gift to you when you were both impecunious high school students.

You have to be careful that inclusion of assets in an irrevocable living trust does not impair the legitime; otherwise, the donation may be reduced or invalidated, and newspaper readers will be entertained by the sibling variant of the scion-on-the-car hood scenario.

Since assets in an irrevocable trust are no longer part of your estate, they will not go through probate court, unlike wills. The practical effect is that if you have specified that your beneficiaries are to receive regular income from the trust, that income will continue even though the other assets that remain with the estate are placed on hold while the will is probated.

Another advantage is that the identities of beneficiaries of cash assets placed in the trust will remain private. This does not hold true, however, for real property, because the document recording the donation of real estate must be notarized, which makes it a public document.

The donation must also be filed with the Registry of Deeds, since there is a transfer of ownership of real property.

Lost ownership and control

The disadvantages of an irrevocable trust are that (1) you cannot change your beneficiaries, and (2) once you have donated the asset you have lost ownership, and therefore control, of that asset forever. So a decision to set up an irrevocable trust is one that has to be carefully considered and not lightly made.

If there is such an animal as an irrevocable trust, is there a revocable trust? The answer is yes. However, if the primary purpose is to reduce estate taxes, a revocable trust is inferior to an irrevocable one. Assets placed in a revocable trust are still part of the trustor’s estate and are subject to estate tax.

However, if we set aside for a moment the single-minded focus on reducing taxes, then a revocable trust, whether an expanded trust or a bank trust, has certain attractions which may be more important to the trustor than merely saving money.

In a revocable trust, the trustor retains control. He can change the beneficiaries, the terms and conditions of the trust, and, in the case of the bank trust, the investment mix, the payout schedule of trust income. Another advantage is that the trustor can name himself as a beneficiary, but—take note—not the only one.

You might want to consider this if Alzheimer’s runs in your family and, sadly, there is no one in your immediate family who can competently manage your affairs or look after your welfare should you, too, fall prey to this disease.

Another problem situation could be one in which a child may be afflicted with a permanent disability, which requires lifelong guardianship by another person. Another child may be so irresponsible that a parent may feel that he should not receive his inheritance until, say, the age of 30, when hopefully, he will have sown his wild oats and settled down.

For most people, the beneficiaries of choice would be their compulsory heirs. However, you can set up a trust for people who are not compulsory heirs—grandchildren, or even people who are unrelated to you, like a faithful old yaya who has spent 50 years of her life caring for you, your siblings and your grandchildren.

I am aware of a situation in which a grandparent worries about a minor grandchild’s long-term care and educational needs in view of the debilitating, permanent illness of the child’s sole parent.

Tax bite

The drawback to setting up a trust for someone not a compulsory heir is the tax bite—30 per cent of the value of the donation.

There is a third party involved in all living trusts—the trustee, which, as the term indicates, should be either a person or an institution in which you have confidence that he/she/it will manage your assets responsibly and prudently on behalf of the beneficiaries.

Most people would opt for a member of the family or a close friend to be a trustee. Some banks, particularly those with personal banking units, will accept trusteeships of expanded living trusts.

Generally, though they like handling money better, i.e., their own living trust product—much less complicated than managing real property. Having a bank as a trustee would be a bit more impersonal than if the trustor has a personal relationship with the trustee.

Also, there is the small matter of personnel turnover. “Relationship banking” notwithstanding, the relationship between the beneficiary and the banker in charge of the trust lasts only as long as that banker remains in that position. The discontinuity may be unsettling for a beneficiary.

On the other hand, the fiduciary aspect is probably stronger than with a family friend as trustee, because of the oversight exercised by the Bangko Sentral ng Pilipinas over banking operations.

Filipino families with blameless personal lives that will not land them in gossip columns as blind items can opt for incorporation. On the other hand, other families may find a living trust arrangement that would suit their circumstances better. Regardless of which option is chosen, you should still make a will if you want to ensure that other assets not included in the trust are distributed in the manner you intend.

You will also need the services of the lawyer and an accountant to set your affairs in order, since I have merely skimmed the surface of what can be very complex arrangements.

Some people might worry about the morality of tax avoidance. Of course, the more high-minded, like my father and a certain high-profile tycoon, might choose to “render to Caesar what is Caesar’s” and not resort to any stratagems.

But for the less high-minded, which is the rest of us, the words of wit and wisdom of the famous economist John Maynard Keynes will apply—“The avoidance of taxes is the only intellectual pursuit that still carries any reward.”

(Many thanks to the bashful lawyer and banker who helped me with this article.)