A founding member of ASEAN, the Philippines is a middle-income ASEAN Member State but is considered a ‘tiger economy’ due to strong growth. In 2024, the Philippine economy maintained a steady gross domestic product (GDP) growth of 5.6% – the second fastest in ASEAN – and the outlook for 2025 also remains bullish, fuelled by lower inflation and higher consumption and investments.
According to McKinsey analysis*, between 2023 and 2030, ultra-high-net-worth (UHNW) and high-net-worth (HNW) families in the Asia-Pacific region are set to experience an intergenerational wealth transfer estimated at USD5.8 trillion. The primary goal for the majority of those transferring wealth is to ensure their hard-earned wealth remains within the family and is used in the way they would have wanted.
Estate planning is a therefore critical process for Filipinos aiming to ensure the seamless transfer of wealth across generations. Wills have traditionally been the primary instrument for asset distribution, but trusts are fast emerging as a versatile and efficient alternative. Understanding the nuances of trusts can empower individuals to manage their assets effectively and cement their legacy.
Understanding Trusts
A trust is a fiduciary arrangement where a person – variously known as the ‘trustor’, ‘grantor’ or ‘settlor’ – transfers legal ownership of property to a trustee, who then holds and manages the property for the benefit of designated beneficiaries.
The practical advantages of a trust are gained from the distinction that is drawn between the formal or legal owner of property, the trustee, and those people that have the use or benefit of the property, the beneficiaries.
The trust principle, which is explicitly recognised in articles 1440 to 1457 of the Civil Code of the Philippines, therefore involves the following key characteristics:
- Trustor/grantor/settlor – the individual who establishes the trust and transfers assets into it.
- Trustee – the person(s) or entity entrusted with managing the trust assets in accordance with the trustor’s instructions.
- Beneficiary – the individual(s) or group who are to benefit from the trust.
- Trust Property – the assets placed in trust.
- Purpose – the purpose for creating the trust.
- Term – the duration of the trust.
The law recognises both ‘express’ trusts, which are trusts created by the intention of the trustor or of the parties, and ‘implied’ trusts, which come into being by operation of law.
Advantages of Trusts in Estate Planning
Trusts offer several benefits over traditional wills:
- Avoidance of Probate – unlike wills, which require probate (the legal process required to validate the will and the assets) trusts can facilitate the direct transfer of assets to beneficiaries without court intervention. This can save time and reduce legal expenses.
- Control over asset distribution – trusts enable the trustor to specify conditions for asset distribution, such as setting age milestones for beneficiaries or allocating income to family members during their lifetime and to charities thereafter.
- Flexibility – trusts can be designed to accommodate various scenarios. For instance, a trustee can delay distributions if circumstances warrant, ensuring that assets are managed prudently.
- Forced heirship – under Philippine law, certain specified heirs (spouse, parents and legitimate children) are entitled to a reserved portion of the estate – the ’legitime’. This cannot be burdened with any condition. If, however, an individual transfers property into a foreign trust that holds the assets indefinitely, forced heirship rules will not be triggered.
Revocable vs. Irrevocable Trusts
When establishing a trust, it’s essential to decide between a revocable and an irrevocable structure:
- Revocable Trust – the trustor retains the ability to modify or revoke the trust during their lifetime. This flexibility allows for adjustments as circumstances change. However, assets in a revocable trust are considered part of the trustor’s estate and are subject to a 6% estate tax upon their death. They will also not be protected from creditors of either the trust or the beneficiaries.
- Irrevocable Trust – once established, this trust cannot be altered or revoked. Assets transferred into an irrevocable trust are no longer considered part of the trustor’s estate, potentially avoiding the 6% estate tax upon the trustor’s death.
Additionally, under Philippine law a trust is only irrevocable if the beneficiaries of the trust cannot be changed. This is intended to ensure that the trustor’s original intentions are honoured.
If structured with great care, an Irrevocable Trust will allow for the efficient transfer of wealth through multiple generations because the assets remain within the trust and are not subject to estate taxes upon the beneficiaries’ deaths. However, the transfer of assets into an Irrevocable Trust is effectively a donation and will therefore attract donor’s tax at 6%.
The decision to set up an Irrevocable Trust or a Revocable Trust is generally, therefore, a choice between paying the 6% donor’s tax at the current asset valuation or the 6% estate tax on the future value at the time of the trustor’s death.
Establishing a Trust
When setting up a trust, it is essential to include the following provisions:
- Identification – clearly identify the trustor, trustee and beneficiaries.
- Property Inventory – provide a detailed list of all assets included in the trust.
- Beneficiary Rights – precisely define the rights of beneficiaries in respect of trust assets.
- Trustee Duties and Powers – outline the responsibilities and authority of the trustee.
- Trust Type – specify whether the trust is revocable or irrevocable.
- Terms and Conditions – detail the conditions for asset management and distribution.
Conclusion
Trusts provide a flexible and efficient means for Filipinos to manage wealth transfer across generations. By carefully selecting the appropriate trust structure and understanding its implications, individuals can ensure that their assets are distributed according to their wishes and uphold their legacy for future generations, while also minimising potential tax liabilities.
It is essential to consult legal professionals to ensure that the trust is structured in accordance with Philippine laws and aligns with the trustor’s objectives.
*Source: McKinsey Global Wealth Pools; McKinsey analysis, 2024
