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BUSINESS TRUSTS

Nature and Classification of TrustsI.


Definition and Essential Characteristic of Trust
1440. A person who establishes a trust is called the trustor; one in whom confidence is
reposed as regards property for the benefit of another person is known as the trustee;
and the person for whose benefit the trust has been created is referred to as the
beneficiary.
Trust
legal relationship between one person having an equitable ownership in property and
another person owing the legal title to such property, the equitable ownership of the
former entitling him to the performance of certain duties and the exercise of certain
powers by the latter
Characteristics of a trust or express trust: (Morales v. CA)
a) It is a relationship.
b) It is a relationship of a fiduciary character.
c) It is a relationship with respect to property, not one involving merely personal
duties
d) It involves the existence of equitable duties imposed upon the holder of the title
to the property to deal with it for the benefit of another
e) It arises as a result of a manifestation of intention to create therelationship
.
Based on Equity
1) 1442. The principles of the general law of trusts, insofar as they are not in conflict
with this Code, the Code of Commerce, the Rules of Court and Special laws are hereby
adopted.
2)Distinguished from Agency
Agency
Trust
Fiduciary in nature
Agent possesses property under agency Trustee takes legal or naked title to the
for and in the name of the owner
subject matter of trust
Essentially revocable

Essentially obligatory in its terms


and
period and can only be rescinded based
on breach of trust

Agent must act upon instructions of the Trustee acts


owner
discretion

on

his

own

business

Agent enters into contract in the name of Trustee enters into contracts in his own
the principal
name.
Agent cannot be sued

Trustee is liable directly and may bes ued


in his trust capacity

Kinds of Trust
1441. Trusts are either express or implied. Express trusts are created by the intention of
the trustor or of the parties. Implied trusts comeinto being by operation of law.
A.Express Trusts
1.Essence and Definition of Express Trusts
Express trust
- one created by the intention of the trustor or of the parties (Art. 1441)
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Those created by direct and positive acts of the parties, by some writing or deed
or will or by words evidencing an intention to create a trust

Essential Characteristics of Express Trusts


a)Nominate and Principal
- for having been given particular name and essentially defined by the Civil Code, and
not needing another contract to be valid and binding
b)Unilateral
- only the trustee assumes obligations to carry on the trust for the benefit of the
beneficiary
c) Primarily gratuitous
-supported by the consideration of liberality, especially when Art. 1446 provides that
beneficiarys acceptance is presumed
d) Real
an express trusts constitute a real contract, that is, it is not merely perfected by a
mere meeting of minds between the trustor and trustee to constitute a trust.Indeed, no
trust relationship exists, until and unless, the property constituting the res is conveyed to
the trustee.
e)Preparatory
-not constituted for its own sake in that the trust relationship is essentially a medium
established by the trustor to allow full authority and discretion on the party of the trustee
to enter into various juridical acts on the corpus to earn income or achieve other goals
given for the benefit of the beneficiary
An express trust may create a form of contract pour atrui
f) .Fiduciary
a)Essentially Contractual in Nature; Need No Particular Wordings
1444. No particular words are required for the creation of an express trust, it being
sufficient that a trust is clearly intended.
What important is whether the trustor manifested an intention to create the kind of
relationship which in law is known as trust. (Julio v. Dalandan)
A clear intention to create trust must be shown, and the proof of fiduciary
relationship must be clear and convincing. (Canezo v. Rojas)
b) Based on Property Relationship
What distinguishes a trust from other relations is the separation of legal title and
equitable ownership of the property. In a trust relation, legal title is vested in thefiduciary
while equitable ownership is vested in a cestui que trust
(Canezo)
Trust, in its technical sense, is a right of property, real or personal, held by one party
for the benefit of another. (Guyv. CA)
c)Fiduciary
The juridical concept of a trust, which in a broad sense involves, arises from, or is the
result of, a fiduciary relation between the trustee and the cestui que trust as regards
certain property
real, personal, funds or money, or choses in action
must not be confused with an action for specific performance. A trustee cannot invoke
the statute of limitations to bar the action and defeat the rights of the cestuis que trustee
. (Pacheco v. Arro)
2.Express Trust must be Proven
An express trust cannot be proven by parol evidence
A trust must be proven by clear, satisfactory, and convincing evidence. It cannot rest
on vague and uncertain evidence or on loose, equivocal or indefinite declarations.
Rule: the burden of proving the existence of a trust is on the party asserting its
existence
The presence of the following elements must be proved:
a) a trustor or settler who executes the instrument creating the trust
b) a trustee, who is the person expressly designated to carry out the trust
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c) the trust res, constituting of duly identified and definite real properties
d) the cestui que trust , or beneficiaries whose identity must be clear
3. Kinds of Express Trust
A. Express Trust involving Immovable
1443. No express trusts concerning an immovable or any interest therein may
be proved by parol evidence.
The existence of express trusts concerning real property may not be established by
parol evidence; thus, it must be proven by some writing or deed
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However, if the parties to the action, during the trial,make no objection to the
admissibility of the oral evidence to support the contract, there is deemed to be a
waiver
The requirement that express trust over immovable must be in writing should be
added as being governed by theStatute of Frauds (Gamboa v. Gamboa)
B. Contractual/ Inter vivos Trust
An inter vivos trusts are expressed trust pursued in the form of donation, and which
therefore become solemn contracts which must comply with the solemnities mandated
by the Law on Donation
C.Testamentary Trust
When an express trust is created under the terms of the last will and testament of the
testator, it is a testamentary trust and is governed by the Law on Succession
- Unless the will conforms with the solemnities and conditions set by law, it will be
void together with the testamentary trust sought to be created therein
A testamentary trust was created by a provision in the will whereby the testator
proposed to create trust for the benefit of a secondary school to be established in the
town of Tayabas, naming as trustee the ayutamiento of the town or if there be none,
then the civil governor of the Province of Tayabas. (Govt of the Phil. Islands v. Abadilla)
D.Pension or Retirement Trusts
Publicly-regulated trusts would be those where the State provides the vehicle by
which institutions are allowed to administer large funds for the benefit of the
public. Among such funds created under the law would be the pension nand benefits
funds administered by the GSIS, the SSS and the Pag-Ibig Fund. Tax laws provide for
incentives to the setting-up of retirement funds for employees. All such funds are really
being administered for the beneficiaries thereof through the medium of trust.
E.Charitable Trusts
4.Parties to an Express Trust
a)Trustora person who establishes a trust (Art. 1440)
b)Trustee one in whom confidence is reposed as regards property for the benefit of
another person (Art. 1440)
i.Trustee must have legal capacity to accept the trust
ii. Failure of Trustee to Assume the Position
1445. No trust shall fail because the trustee appointed declines the designation, unless
the contrary should appear in the instrument constituting the trust.
In case of refusal to accept the trust by the trustee, the court will appoint a trustee.
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But, if the appointment of the trustee is a material provision, the trustor can
provide that a refusal of the trustee to accept the trust shall result in the failure
or nullification of the same

iii.Obligations of the Trustee (Rule 98 of Rules of Court)


Sec. 1. Where trustee appointed. - A trustee necessary to carry into effect the provisions
of a will or written instrument shall be appointed by the Court of First Instance in which
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the will was allowed if it be a will allowed in the Philippines, otherwise by the Court of
First Instance of the province in which the property, or some portion thereof, affected by
the trust is situated.
Sec. 2. Appointment and powers of trustee under will; Executor of former trustee need
not administer trust. - If a testator has omitted in his will to appoint a trustee in the
Philippines, and if such appointment is necessary to carry into effect the provisions of
the will, the proper Court of First Instance may, after notice to all persons interested,
appoint a trustee who shall have the same rights, powers, and duties,and in whom the
estate shall vest, as if he had been appointed by the testator. No person succeeding to
a trust as executor or administrator of a former trustee shall be required to accept such
trust.
Sec. 3. Appointment and powers of new trustee under written instrument. - When a
trustee under a written instrument declines, resigns, dies, or is removed before the
objects of the trust are accomplished, and no adequate provision is made in such
instrument for supplying the vacancy, the proper Court of First Instance may, after due
notice to all persons interested, appoint a new trustee to act alone or jointly with the
others, as the case may be. Such new trustee shall have and exercise the same
powers, rights, and duties as if he had been originally appointed, and the trust estate
shall vest in him in like manner as it had vested or would have vested, in the trustee in
whose place he is substituted; and the court may order such conveyance to be made by
the former trustee or his representatives, or by the other remaining trustees, as may be
necessary or proper to vest the trust estate in the new trustee, either alone or jointly
with the others.
Sec. 5. Trustee must file bond. Before entering on the duties of his trust, a trustee shall
file with the clerk of the court having jurisdiction of the trust a bond in the amount fixed
by the judge of said court, payable to the Government of the Philippines and sufficient
and available for the protection of any party in interest, and a trustee who neglects to file
such bond shall be considered to have declined or resigned the trust; but the court may
until further order exempt a trustee under a will from giving a bond when the testator
has directed or requested such exemption, and may so exempt any trustee when all
persons beneficially interested in the trust, being of full age, request the exemption.
Such exemption may be cancelled by the court at any time and the trustee required to
forthwith file a bond.
Sec. 6. Conditions included in bond. - The following conditions shall be deemed to be a
part of the bond whether written therein or not:(a) That the trustee will make and return
to the court, at such time as it may order, a true inventory of all the real and personal
estate belonging to him as trustee, which at the time of the making of such inventory
shall have come to his possession or knowledge;(b) That he will manage and dispose of
all such estate, and faithfully discharge his trust in relation thereto, according to law and
the will of the testator or the provisions of the instrument or order under which he is
appointed;(c) That he will render upon oath at least once a year until his trust is fulfilled,
unless he is excused there from in any year by the court, a true account of the property
in his hands and of the management and disposition thereof, and will render such other
accounts as the court may order;(d) That at the expiration of his trust he will settle
his accounts in court and pay over and deliver all the estate remaining in his hands, or
due from him on such settlement, to the person or persons entitled thereto.But when the
trustee is appointed as a successor to a prior trustee, the court may dispense with the
making and return of an inventory, if one has already been filed, and in such case the
condition of the bond shall be deemed to be altered accordingly.
iv.Generally, trustee does not assume personal liability on the trust as to properties
outside the trust estate
When the transaction at hand could have been entered into by a trustee either as such
or in its individual capacity, then it must be clearly indicated that the liabilities arising
there from shall be chargeable to the trust estate, otherwise they are due from the
trustee inhis personal capacity (Senguan v. Phil. Trust Co.)
v.Trustee generally entitled to receive a fair compensation for his services
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Under Section 7 of Rule 98 of the Rules of Court, if the compensation of the trustee is
not determined in the instrument creating the trust, his compensation shall be fixed by
the court that appointed him.c)
Beneficiary
the person for whose benefit the trust has been created (Art. 1440)
In regard to private trusts, it is not always necessary that the cestui que trust
should be named, or even be in esse atthe time the trust is created in his favor
(Abadilla)
Acceptance by beneficiary of gratuitous trust is not subject to the rules for the
formalities of donations
d)The Corpuso r the Res
The subject matter of the trust
5.How Express Trust is Terminated
A.Destruction of the Corpus
When the entire trust estate is loss or destroyed, the trust is extinguished since the
underlying proprietary basis no longer exists to warrant any legal relationship between
the trustee and the beneficiary.
B.Revocation by the Trustor
In a revocable express trust, the trustee may simply invoke the revocation or
termination clause found in the deed of trust thereby revoking the trust and conveying
notice thereof to the trustee. Unless there is reserved power to revoke, the general rule
is that an express trust is irrevocable.
C.Achievement of Objective, or Happening of the Condition Provided for in the
Trust Instrument
When the trust instrument provides the objective or the condition upon which the trust
shall be extinguished, say when the trust instrument provides that full ownership in the
trust properties shall be consolidated in the person of the beneficiary once he reaches
the age of majority, the happening of the condition shall terminate the trust
D.Confusion or Merger of Legal Title and Beneficial Title in the Same Person
When the trustee of an existing trust becomes the beneficiary thereof, or
vice versa, the trust relation is ipso jure extinguished, for it is difficult to see how a
person can owe fiduciary duties to himself.
E.Breach of Trust
When a trustee breaches his duty of loyalty, it would constitute legal basis by which to
terminate the trust
-This operates as a renunciation of the trust and the persons interested as beneficiaries
in the property are entitled to maintain an action to declare their right and remove the
unfaithful trustee.
F.Upon the Death of Trustee
Unless otherwise expressly stipulated in the trust instrument, the death, civil
interdiction, insanity or insolvency of the trustee does not necessarily terminate the trust
but a new trustee will be appointed
The reason why a trust does not fail for want of a trustee is that to permit it to fail
for this reason would be contrary to the intention of the trustor in creating the trust.
The trustor is primarily interested in the disposition of the beneficial interest in the
property, and the matter of its administration is a subsidiary consideration.
(Tolentino, at p. 676.)
A trust terminates upon the death of the trustee where the rust is personal to the
trustee in the sense that the trustor intended no other person to administer it
After Crispulos death, the respondent had no right to retain possession of the
property. At such point, a constructive trust would be created over the property by
operation of law
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Where one mistakenly retains property which rightfully belongs to another, a


constructive trust is the proper remedial devise to correct the situation
.
G. Generally Express Trusts Not Susceptible to Prescription
When there exists an express trust, prescription and laches will run only from the time
the express trust is repudiated
The rule requires a clear repudiation of the trust duly communicated to the beneficiary
For acquisitive prescription to bar the action of the beneficiary against the trustee, in
an express trust, for the recovery of the property, it must be shown that:
a) Trustee has performed unequivocal acts of repudiation amounting to an ouster of
the cestui que trust
b) Such positive acts of repudiation have been made known to the cestui qui trust
c) Evidence thereon is clear and conclusive
III.Implied Trusts
1.Listing of Implied Trusts Not Exclusive; Founded on Equity
1447. The enumeration of the following cases of implied trust does not exclude other
established by the general law of trust, but the limitation laid down in Art. 1442 shall be
applicable.
Implied trusts
from the facts and circumstances of a given case, the existence of a
trust relationship is inferred in order to effect the presumed intention of the
parties or to satisfy the demands of justice or to protect against fraud
Those which are deducible from the nature of the transactions as matters of
intent, or which are super-induced on the transaction by operation of law as
matters of equity,independently of the particular intention of the parties
a)Resulting Trusts
A trust which is raised or created by the act or construction of law
A trust raised by implication of law and presumed always to have been contemplated
by the parties, the intention as to which is to be found in the nature of their transaction,
but not expressed in the deed or instrument of conveyance
Based on the equitable doctrine that valuable consideration and not legal title
determines the equitable title or interest and are presumed always to have been
contemplated by the parties
b)Constructive Trusts
A trust raised by construction of law, or arising by operation of law
A trust not created by any words, either expressly or impliedly evincing a direct
intention to create a trust, but by the construction of equity in order to satisfy the
demands of justice
A constructive trust is not a trust in technical sense
There is neither promise nor fiduciary relations
The so-called trustee does not recognize any trust and has no intent to hold the
property for the beneficiary
Otherwise known as a trust ex maleficio, a trust ex delicto, a trust de son tort , an
involuntary trust, or an implied trust
A trust by operation of law which arises contract to intention and in invitum, against on
who, by fraud, actual or constructive, by duress or abuse of confidence, by commission
of wrong, or by any form of unconscionable conduct, artifice, concealment, or
questionable means, or who in any way against equity and good conscience, either has
obtained or holds the legal right to property which he ought not, in equity and good
conscience, hold and enjoy
Constructive trusts are fictions of equity that the courts use as devices to remedy any
situation in which the holder of the legal title may not, in good conscience, retain the
beneficial interest
c)Distinction between Resulting and Constructive Trust
Resulting Trust
Constructive Trust
Based on equitable doctrinethat valuable
Created by the construction of equity in
consideration,and not legal title,
order to satisfy the demands of justice
determines the equitable title or interest
andp revent unjust enrichment
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Presumed always to have been


contemplated by the parties

Arise contrary to intention against who [in


bad faith]ought to hold the legal right to
Property

d)How to Prove Implied Trust


Must be proven by clear, satisfactory and convincing evidence, and cannot rest on
vague and uncertain evidence or on loose, equivocal or indefinite declarations
May be proven by oral evidence, but the evidence must be trustworthy and received
by the courts with extreme caution, and should not be made to rest on loose, equivocal
or indefinite declarations
e)Distinguished from Quasi-Contracts
Both embody the principle of equity above strict legalism
2.Purchase of Property where Beneficial Title in One Person, but Price Paid by
Another Person
1448. There is an implied trust when property is sold, and the legal estate is granted to
one party but the price is paid by another for the purpose of having the beneficial
interest of the property. The former is the trustee, while the latter is the beneficiary.
However, if the person to whom the title is conveyed is a child, legitimate or illegitimate,
of the one paying the price of the sale, no trust implied by law, it being disputably
presumed that there is a gift in favor of the child.
Rationale: one who pays for something usually does so for his own benefit
3.Purchase of Property where Title is Placed in the Name of Person who Loaned
the Purchase Price
1450. if the price of a sale of property is loaned or paid by one person for the benefit of
another and the conveyance is made to the lender or payor to secure the payment of
the debt, a trust arises by operation of law in favor of the person to whom the money
isloaned or for whom it is paid. The latter may redeem the property and compel a
conveyance thereof to him.
It is only after the beneficiary reimburses the trustee of the purchase price that the
former can compel conveyance of the property from the latter
4.When Absolute Conveyance of Property Effected only as Means to Secure
Performance of Obligation of the Grantor
EquitableMortgage
1454. If an absolute conveyance of property is made in order to secure the performance
of an obligation of the grantor toward the grantee, a trust by virtue of law is established.
If the fulfillment of the obligation is offered by the grantor when it becomes due, he may
demand the reconveyance of the property to him.
5.Two or More Persons Purchase Property Jointly, but Places Titlein One of Them
1452. If two or more persons agree to purchase property and by common consent the
legal title is taken in the name of one of them for the benefit of all, a trust is created by
force of law in favor of the others in proportion to the interest of each.
6.Property Conveyed to Person Merely as Holder thereof
1453. When property is conveyed to a person in reliance upon his declared intention to
hold it for, or transfer it to another or the grantor; there is an implied trust in favor of the
person whose benefit is contemplated.
Under this, the implied trust is enforceable even when the agreement is not in writing
This article applies if the person conveying the property did not expressly state that he
was establishing the trust but such is the intention
7.Donation of Property to a Donee who shall have No BeneficialTitle
1449. There is also an implied trust when a donation is made to aperson but it appears
that although the legal estate is transmitted tothe donee, he nevertheless is either to
have no beneficial interest oronly a part thereof.
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8.Land Passes by Succession but Heir Places Title in a Trustee


1451. When land passes by succession to any person and he causes the legal title to
be put in the name of another, a trust is established by implication of law for the benefit
of the true owner.
9.When Trust Fund Used to Purchase Property which is Registered in Trustees
Name
1455. When any trustee, guardian or other person holding a fiduciary relationship uses
trust funds for the purchase of property and causes the conveyance to be made to him
or to a third person, a trust is established by operation of law in favor of the person
to whom the funds belong.
10.When Property is Acquired through Mistake or Fraud
1456. If property is acquired through mistake or fraud, the person obtaining it is, by
force of law, considered a trustee of an implied trust for the benefit of the person from
whom the property comes.
When a person through fraud succeeds in registering the property in his name, the
law creates what is called a constructive or implied trust in favor of the defrauded party
and grants the latter the right to recover the property fraudulently registered within a
period of 10 years (Heirs of Patiwayon v. Martinez)

The period reckoned from the issuance of the adverse title to the property which
operates as a constructive notice
Public policy demands that a person guilty of fraud or, at least,of breach of trust,
should not be allowed to use a Torrens title as a shield against the consequences of
his wrongdoing
11.Does Implied Trust Prescribe or may it be Defeated by Laches?
The prescriptive period of 10 years for an action of reconveyance applies only if there
is an actual need to reconvey the property as when the plaintiff is not in possession
thereof
Point of reference is the date of registration of the deed or the date of the
issuance of the certificate of title of the property provided that the property has
not been acquired by an innocent purchaser for value
When plaintiff is in possession of the subject property, the action, being in effect that of
quieting of title to the property,does not prescribe
Prescription cannot apply when title of Trustee is Void due to Forgery
In constructive trusts, prescription may supervene even if the trustee does not
repudiate the relationship
Repudiation of the said trust is not a condition precedent to the running of the
prescriptive period
Close relationship and Continued recognition of Trust relationship

The doctrine of laches is not to be applied mechanically as between the near


relatives which would tend to excuse what otherwise may be considered a long
delay in taking action
Moreover, continued recognition of the existence of the trust precludes the
defense of laches
Though the Statute of Limitations does not run between thetrustee and cestui que
trust as long as the trust relations subsist, it does run between the trust and third
persons
Prescription cannot apply against a Minor Beneficiary in Implied Trust