TRUST LAW

A. Definition - 1440

Article 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 5the beneficiary.

TRUST – the fiduciary relationship between one person having an equitable ownership in property and another owning the legal title to such property, the equitable ownership of the former entitling him to the performance of certain duties and exercise of certain powers by the latter for the benefit of the former.

- 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.

Implies confidence in a relationship

- ‘TRUST’ implies such confidence in a relationship intentionally created, involving a trustee, a beneficiary, and a trust property and not one involving merely personal duties, imposing equitable duties upon the trustee with respect to the property to deal with it for the benefit of the beneficiary.

Trust cannot be established in violation of law.

- Trust is founded in equity and can never result from acts violative of law. Thus, no trust can result from a contract of partnership formed for an illegal purpose. Since the contract is null and void, no rights and obligations can arise therefrom.

Concept of trust

- It is a fiduciary relationship created by agreement or by law where the trustor of the property has the equitable title while the legal title is vested in another (trustee). The trustee holds the property for the benefit of another (beneficiary) who could be the trustor himself or a third person.

PERSON INVOLVED IN THE CREATION OF TRUST

1. Trustor – the person who intentionally creates or establishes the trust. He transfers legal ownership of property or assets to a person for the benefit of a third party, who owns the equitable title.

2. Trustee – the person who takes and holds the legal title to the property in trust and manages it solely for the benefit of another, with certain powers and subject to certain duties. The trustee may be a natural person or a legal entity; and

3. Beneficiary or cestui que trust – 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. He is the recipient of the trust. The beneficiary may also be a natural person or a legal entity. The trust may provide for more than one beneficiary.

Trustor may establish a trust with him as a trustee or trustor. He cannot, however, be the sole trustee and the sole beneficiary of a single trust. In such case, both the legal and equitable titles to the trust property would merged in the trustee and he would hold the property free of any trust.

ESSENTIAL ELEMENTS OF TRUST

(1) a settlor or trust creator; (2) settlor's intent to create a trust; (3) trust property; (4) trustee who owns legal title; and (5) beneficiaries who own equitable title (i.e., the right to enjoy the property).

TRUST as distinguished from other relations

TRUST VS. BAILMENT

TRUST BAILMENTA delivery of property in trust necessarily involves a transfer of legal title, or at least a separation of equitable interest and legal title, with the legal title in the trustee.

It is the characteristic of a bailment that the bailee has possession of, without legal title to, the property subject to the bailment.

Both the trustee and the bailee control property which is not beneficially their own. Moreover, neither is an insurer of the property. A trustee will not be liable to compensate for loss of trust without proof of breach of trust and a bailee will not be liable for loss or damage unless the bailment contract states otherwise. A bailee, like a beneficiary, can trace the bailed property or its proceeds into the hands of third parties.

TRUST VS. DONATION

TRUST DONATIONAn existing legal relationship and involves the separation of legal and equitable title

Is a transfer of property as well as the disposition of both legal and equitable ownership except in cases of gifts in trust.

It is not subject to the rules governing donations of real property. The beneficiary of a trust may demand performance of the obligation without having formally accepted the benefit of the trust in a public document, upon mere acquiescence in the formation of the trust and acceptance under second paragraph of Art. 1311

The done must comply with the legal requirements in accepting donations

Both in donation and trust, acceptance of the donee and beneficiary is necessary or essential. However, in donation, acceptance must be made in the public instrument executing such donation or in a separate public instrument where in trust, acceptance shall be presumed if it imposes no onerous condition upon the beneficiary.

TRUST CONTRACTAlways involves an ownership, embracing a set of rights and duties fiduciary in character which may be created by a declaration without a consideration

A legal obligation based on an undertaking supported by a consideration, which obligation may or may not be fiduciary in character.

TRUST DEBTRight of the Third Person

The beneficiary of a trust has a beneficial interest in the trust property.

A creditor has merely a personal claim against the debtor.

Existence of Fiduciary RelationshipThere is a fiduciary relationship between a trustee and a beneficiary.

There is no beneficiary relationship between a debtor and a creditor.

TRUST AGENCYBoth trust and agency are fiduciary in nature. As regards the essence of the matter, a trustee is not an owner at all, but sort of an agent, upon whim the law has conferred the power and imposed the duty of administering the property of another person. But in legal theory, however, the trustee is not a mere agent but an owner.Title to trust must be vested in a trustee An agency relationship can be created without

vesting any property in the agent.A trustee who makes a contract in the administration of the trusts contracts as principal having legal title on the property

An agent creates a contract on behalf of the principal, he himself is not a part to the contract with another party.

If a trustee dies, the trust is not terminated but a new trustee is appointed.

The relationship of principal and agent terminates on the death of either.

TRUST PROPERTY

The property so held is referred as the “trust property” of “trust res” which is the subject matter of the trust.

It must consist of property actually in existence in which the trustor has a transferable interest or title although it may, as a rule, be any kind of transferrable property either realty or personalty. But it cannot be mere expectancy without right or interest or a mere interest is in the nature of a property right.

The trust property is owned by two persons at the same time, the relation between the two owners being such that one of them is under an obligation to use his ownership for the benefit of the other.

The ownership of the trustee is a mere matter form rather substance, and nominal rather than real. The trustee is not a mere agent, but an owner.

NOTES: A trust is not void for indefiniteness if by its terms the whole property will go to the beneficiaries who are underdetermined but will be determined at the termination of the trust, at the latest. It is not necessary to the creation of a trust that the cestui que trust be named or even be in the existence at the time of its creation.

ARTICLE 1441. Trusts are either express or implied. Express trusts are created by the intention of the trustor or of the parties. Implied trusts come into being by operation of law.

CLASSIFICATION OF TRUST

As to effectivity – from the viewpoint of whether they become effective after death of the trustor or during his life, they may be either:

(a) Testamentary Trust – one which is to take effect upon the trustor’s death. It is usually included as part of the will and does not have a separate trust deed.

(b) Living trust or inter vivos trust – one established effective during the owner’s life. The grantor executes a “trust deed” and once the trust is created legal title to the trust property passes to the named trustee with duty to administer the property for the benefit of the beneficiary.

As to creation – from the viewpoint of the creative force bringing them into existence, it may be either:

1. EXPRESS TRUST – created by the intention of the trustor or of the parties. It is created by the direct and positive acts of the parties, by some writing, deed, will or by words, either expressly or impliedly evincing an intention to create a trustELEMENTS:a. A competent trustor and trustee;b. An ascertainable trust res; andc. Sufficiently certain beneficiaries.

2. IMPLIED TRUST – one which comes into being by operation of law. This may either be:a. Resulting trust – one which the intention to create a trust is presumed by law to exist from

the transaction and facts of the case.b. Constructive trust – one imposed by law irrespective of and even contrary to the intention of

the parties. It is designed to promote justice frustrate fraud and prevent unjust enrichment.

EXPRESS TRUST VS. IMPLIED TRUST

Express ImpliedAs to creation

Created by the intention of the parties Come into being by operation of law.As to proof of trust

An express trust over an immovable property or any interest therein cannot be proved by parole evidence

An implied trust over an immovable or any interest therein may be proved by oral evidence.

As to prescriptionAction must be made within 10 years from the knowledge of the repudiation, otherwise prescribed.

In resulting trust, action must be made within 10 years from knowledge of repudiation, otherwise prescribed.

In constructive trust, it must be 10 years from the date of registration.

As to applicability of the Doctrine of LachesAn express repudiation made known to the beneficiary is necessary in order that laches or acquisitive prescription may bar an action to enforce an express trust

In constructive trust, even if there is no repudiation, laches may bar an action to enforce an implied trust.Exception, if there is concealment.

ARTICLE 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.

Express Trusts – those trust voluntarily and intentionally, created by direct and positive act of the trustor, by some writing, deed, will, or oral declaration evincing an intention to create the trust.

PROOF OF TRUST:

General rule: trust whether express or implied may be proved by parol evidence.

EXCEPTION: ARTICLE 1443. No express trusts concerning an immovable or any interest therein may be proved by parol evidence.

ARTICLE 1444. No particular words are required for the creation of an express trust, it being sufficient that a trust is clearly intended.

May be waived, either by failure to interpose timely objections against the presentation of oral evidence not admissible under the law or by cross-examining the adverse party and his witness along the prohibited lines.

An express trust over personal property or any interest therein, an implied trust, whether the property subject to the trust is real or personal, may be proved by oral evidence.

The creation of an express cannot be assumed from loose and vague declarations or circumstances capable of other interpretations.

Consideration is not required to establish a trust.

KINDS OF TRUST

1. Living trust or Inter vivos trust - one established effective during the owner’s life. The grantor executes a “trust deed” and once the trust is created legal title to the trust property passes to the named trustee with duty to administer the property for the benefit of the beneficiary.

2. Testamentary Trust – one which is to take effect upon the trustor’s death. It is usually included as part of the will and does not have a separate trust deed.

3. Charitable trust – one designed for the benefit of a segment of the public or of the public in general. It is one created for charitable, educational, social, religious, or scientific purpose, or for the general benefit of humanity.

4. Spendthrift trust – one established when the beneficiary need to be protected, because of his inexperience or immaturity from his imprudent spending habits or simply because the beneficiary is spendthrift. Income will be paid to the beneficiary only when actually necessary. Under some circumstances, the trustee will pay directly to the creditor for obligations of the beneficiary.

5. Totten trust - one party (the settlor or "grantor" of the trust) places money in a bank account or security with instructions that upon the settlor's death, whatever is in that account will pass to a named beneficiary. (The name is derived from Matter of Totten, 179 N.Y. 112 (1904), the case decided by the New York Court of Appeals which established the legality of this practice.)

Other Kinds:

1. Accumulation trust – one that will accumulate income to be reinvested by the trustee in the trust for the period of time specified.

2. Sprinkling trust – one that gives the trustee the right to determine the income of the beneficiaries who would receive income each year and the amount thereof.

ARTICLE 1445. No trust shall fail because the trustee appointed declines the designation, unless the contrary should appear in the instrument constituting the trust.

ARTICLE 1446. Acceptance by the beneficiary is necessary. Nevertheless, if the trust imposes no onerous condition upon the beneficiary, his acceptance shall be presumed, if there is no proof to the contrary.

NECESSITY OF ACCEPTANCE FOR THE CREATION AND VALIDITY OF A TRUST RELATIONSHIP

1. Acceptance of a trusteea. NOT NECESSARY to its existence and validity since if he declines, the court will appoint a

trustee to fill the office that he declines. EXCEPTION: if the trustee declines, the trust is ineffective if the trustor expressly provides that he would not entrust such to any other.

b. But a trustee’s acceptance of an express trust is necessary to charge him with the office of the trustee and the administration of the trust and to vest the legal title to him.

c. Renunciation of a trust after its acceptance can only be by resignation or retirement with court approval or at least, with agreement of beneficiaries and on satisfaction of all legal liabilities growing out of the acceptance of the trust.

2. Acceptance of the beneficiarya. ESSENTIAL to the creation and validity of a trust. However, such acceptance is presumed if

there is no proof to the contrary and the trust does not impose any onerous condition upon the beneficiary.

b. Even if real property is involved, the acceptance need not be in a public instrument.

EXTINGUISHMENT OF EXPRESS TRUST

1. Accomplishment of the purpose of the trust2. Expiration of the agreed term3. Mutual agreement of all the parties4. Exercise of power to terminate (Annulment or rescission of trust)5. Happening of the resolutory condition, if one had been imposed.6. Total loss of the object of trust7. Decision of court declaring the trust terminated8. Merger of rights of the trustor and the trustee, as when the trustor waived his rights in favor of

the trustee or vice versa9. Prescription.

REQUISITES OF EXPRESS TRUST TO CLAIM PRESCRIPTION

1. He has performed OPEN and UNEQUIVOCAL acts of repudiation

2. Such positive acts of repudiation have been made known to the benficiary or the cestui que trust

3. The evidence thereon should be clear and convincing and4. The period fixed by law has been expired for 10 years from the time that the repudiation is

made known to the beneficiary in cases of express trust or resulting trust while 10 years from the time a constructive trust arises.

Note: reckoning point is repudiation of the trust by the trust by the trustee because from that moment his possession becomes adverse which gives rise to a cause of action.

TRUST PURSUIT RULE

Equity will pursue property that is wrongfully converted by the fiduciary, or otherwise compel restitution to the beneficiary. A trust will follow the property through all changes in its state and form, provided its product or proceeds are capable of identification.

CHAPTER 3

Implied Trusts – those which, without being express, are deducible from the nature of the transaction as matters of intention, or which are superinduced on the transaction by operation of law as matters of equity, independently of the particular intention of the parties.

While implied trust may be proved by parol evidence, 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. The proof should be as fully convincing as if the acts giving rise to the trust obligation are proven by authentic document.

ARTICLE 1447. The enumeration of the following cases of implied trust does not exclude others established by the general law of trust, but the limitation laid down in article 1442 shall be applicable.

KINDS OF IMPLIED TRUST

1. Resulting – a trust which is raised or created by the act or construction of law. It is 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.

2. Constructive – trust raised by construction of law or arising by operation by law. It is a trust not created by any words, either expressly or impliedly, evincing a direct intention to create a trust by the construction of equity in order to satisfy the demands of justice and prevent unjust enrichment. It does not arise by agreement or intention but by operation of law against one who, by fraud, duress, or abuse of confidence obtains or holds the legal right to property which he ought not, in equity and good conscience, to hold.

Resulting ConstructiveIntention to create trust

The intent of the parties to create a trust is The trust is created irrespective of or even

presumed or implied by law from the nature of their transaction

contrary to the intentions of the parties to promote justice, frustrate fraud and to prevent unjust enrichment.

Prescriptive periodThe 10 year prescriptive period shall be counted

from the time repudiation is made known to the beneficiary.

The 10 year prescriptive period shall be counted from the time that the constructive trust arises, i.e. from the date of registration.

ExamplesArticles 1448, 1449, 1451, 1452, 1453 1450, 1454, 1455, 1456

RESULTING TRUST

ARTICLE 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 is implied by law, it being disputably presumed that there is a gift in favor of the child. aisa dc

ARTICLE 1449. There is also an implied trust when a donation is made to a person but it appears that although the legal estate is transmitted to the donee, he nevertheless is either to have no beneficial interest or only a part thereof.

ARTICLE 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.

ARTICLE 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.

ARTICLE 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.

CONSTRUCTIVE TRUST

ARTICLE 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 is loaned or for whom it is paid. The latter may redeem the property and compel a conveyance thereof to him.

ARTICLE 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.

ARTICLE 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.

ARTICLE 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.

PROOF OF IMPLIED TRUST

ARTICLE 1457. An implied trust may be proved by oral evidence.

REQUISITES BEFORE PERIOD OF PRESCRIPTION MAY START IN REGARD TO AN ACTION BASED ON AN IMPLIED TRUST

1. Trustee has performed unequivocal acts of repudiation amounting to an ouster of the cestui que trust.

2. Such positive acts of repudiation have been made know to the cestui que trust; 3. Evidence thereon must be clear and positive.

The 4 year prescriptive period under Art. 1391 applies only if fraud does not give rise to an implied trust, and the action is to annul a voidable contract under Art. 1390.

An action for reconveyance of a parcel of land based on an implied or constructive trust prescribes in ten years, the point of reference being the date of registration of the deed or the date of the issuance of the certificate of the deed or the date of the issuance of the certificate of title over the property. Since such issuance operates as a constructive notice to the whole world, the discovery of fraud is deemed to have taken place at that time. But, this rule only applies only when the plaintiff or person enforcing trust is not in possession of the property, the right to seek reconveyance, which in effect seeks to quiet title to property, does not prescribe.

NOTE: Discovery of fraud must be deemed to have taken place from the issuance of the certificate of title because registration of real property is considered a constructive notice to all person and it shall be counted from the time of such registering, filing or entering.