Trusts: General Provisions (Arts. 1440-1442)

CHAPTER 1

General Provisions (Arts. 1440-1442)

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 the beneficiary.

Concept of trust. 

• A trust is 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 the exercise of certain powers by the latter for the benefit of the former. 
• It is a legal arrangement where by 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. 

1. Trust implies confidence in a relationship.
• The word “trust” is often employed in a broader or popular sense as denoting “confidence,” “fiduciary relationship,” etc. and is often used in reference to the confidential aspect of any kind of a bailment or possession by one person of the property of another. 
• It indicates duties, relations, and responsibilities which are not strictly technical trusts.
• In its more technical significance, the word still 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.
2. Trust cannot be established in violation of law. 
• A trust is the right, enforceable in equity, to the beneficial enjoyment of property the legal title to which is in another. 
• 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 not new.

• The Civil Code of 1889 contains no specific provisions on trusts as does the new Civil Code. 
• Neither does the Code of Civil Procedure of 1901 for the same merely provides for the proceeding to be followed relative to trusts and trustees. (Chapter XVIII.) 
• This silence, however, does not mean that the juridical institution of trust was unknown in our jurisdiction before the effectivity of the new Civil Code.
• As the law of trust has been much more frequently applied in England and in the United States than it has in Spain, the Supreme Court has drawn upon American precedents in determining the effects of trust, especially so because the trusts known to American and English equity jurisprudence are derived from the fidei commissa of the Roman Law and are based entirely upon civil law principles.

Trust distinguished from other relations.

• What distinguishes a trust from other legal relations is the separation of the legal title and the equitable ownership of the subject property between two or more people. 

Trust v. Bailment.

• Trust
• A delivery of property 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.
• Bailment
• The bailee has possession of, without legal title to, the property subject to the bailment. 

Trust v. Donation.

• Trust
• It is an existing legal relationship and involves the separation of legal and equitable title.
• Donation
• It is a transfer of property and except in the case of a gift in trust, involves a disposition of both legal and equitable ownership. 

• A trust constituted between two contracting parties for the benefit of a third person 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 the second paragraph of Article 1311 of the Civil Code.

Trust v. Contract.

• Trust
• A trust always involves an ownership, embracing a set of rights and duties fiduciary in character which may be created by a declaration without a consideration.
• Contract
• A contract is a legal obligation based on an undertaking supported by a consideration, which obligation may or may not be fiduciary in character. 

Trust v. Debt.

• Trust
• The beneficiary of a trust has a beneficial interest in the trust property.
• There is a fiduciary relation between a trustee and a beneficiary, but there is no such relation between a debtor and creditor. 
• A trust refers to a duty to deal with a specific property for the benefit of another.
• Debt
• A creditor has merely a personal claim against the debtor.
• A debt implies merely an obligation to pay a certain sum of money.

• If a creditor-debtor relationship exists, but not a fiduciary relationship between the parties, there is no express trust. 
• However, it is understood that when the purported trustee of funds is entitled to use them as his or her own (and commingle them with his or her own money), a debtor-creditor relationship exists, not a trust.

Persons involved in the creation of an express trust. 

• Generally, at least three (3) people are needed for an express trust.

1. The trustor (creator/settlor/grantor) 
• 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 title; 
2. The trustee 
• 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;
3. The 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 may be a natural person or a legal entity. The trust may provide for more than one beneficiary. 

Trustor as trustee or beneficiary.

• The trustor may establish a trust with him as the trustee or the beneficiary. 
• 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 be merged in the trustee and he would hold the property free of any trust.

Trust property.

• The juridical concept of a trust arises from or is the result of a fiduciary relation between the trustee who holds legal title and the cestui que trust who has the equitable title as regards certain property. 
• The subject-matter of a trust may be any property of value:
• real
• personal
• funds or money, or
• choses in action
• The property so held is referred to as the “trust property” or “trust res.”
• “Corpus’’ and “principal’’ are names also used for the trust property. 
• The trust res 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 transferable property either realty or personalty including undivided, future, or contingent interest therein. 
• But a trust res cannot be a mere expectancy without right or interest or a mere interest in the performance of a contract although such interest is in the nature of a property right.

Nature of ownership of trustee and beneficiary.

• A trust is a very important and curious instance of duplicate ownership.

1. Ownership by two persons at the same time.
• The trust property is owned by two persons at the same time, the relation between the two owners being such that one of them with legal title under an obligation to use his ownership for the benefit of the other. 
• the former is called the trustee, and his ownership is trust-ownership;
• the other is called the beneficiary, and his is beneficial ownership.
• The interest of the beneficiary in trust property is also called “equitable ownership.’’
• A trustee on behalf of his principal may apply for original registration of any land held in trust by him unless prohibited by the instrument creating the trust. 
2. Ownership of trustee, a mere matter of form and nominal.
• The trustee is destitute of any right of enjoyment of the trust property. 
• His ownership, therefore, is a mere matter of:
• form rather than of substance, and 
• nominal rather than real. 
• If we have to regard the essence of the matter, a trustee is not an owner at all, but a sort of an agent, upon whom the law has conferred the power and imposed the duty of administering the property of another person.
• The trustee may be accorded the right to prosecute a suit, but only on behalf of the beneficiary who must be included in the title of the case and shall be deemed to be the real party-in-interest. 
3. Trustee, not mere agent. 
• In legal theory, however, the trustee is not a mere agent but an owner. 
• He is a person to whom the property of someone else is fictitiously attributed by the law, to the extent that the rights and powers thus vested in a nominal owner shall be used by him on behalf of the real owner.
4. Transfer of equitable title.
• The interests of the beneficiary in the trust can, in general, be:
• reached by his creditors
• he can sell 
• he can dispose of them
• The beneficiary can transfer only the interests he holds — the equitable title. 
5. Rights of beneficiary. 
• Depending on the terms of the trust instrument, the beneficiary may receive the income from:
• the assets of the trust, 
• the assets themselves, or 
• both. 

Character of office of trustee. 

1. As principal. 
• The trustee is not an agent of the trust estate or of the cestui que trust, but he acts for himself in the administration of the trust estate, although subject to the terms of the trust and the law of trusts. 
• He cannot act as an agent of the trust estate for the reason that it lacks juristic personality. 
• In other words, a trust and an agency are distinguishable on the basis of the non-representative role of the trustee and the representative role of the agent.
2. As agent.
• In some cases, however, a trustee has been regarded as an agent of beneficiaries of the trust at least for certain purposes, such as for the purpose of imputing to the beneficiaries of the trust notice given to the trustee.
•  By some statutes, it is provided that a trustee is a general agent for the trust property and that his acts within the scope of his authority bind the trust estate to the same extent as the acts of an agent bind his principal.
3.  As fiduciary. 
• A trustee, like an executor or administrator, holds an office of trust. 
• The duties of the latter are, however, fixed and/or limited by law, whereas those of trustee of an express trust are, usually, governed by the intention of the trustor or of the parties, if established by contract. 
• Besides, the duties of trustees may cover a much wider range than those of executors or administrators of the estate of deceased persons. 

Necessity of existence of beneficiary. 

• A trust is not void for indefiniteness if by its terms the whole property will go to the beneficiary or beneficiaries who is/are undetermined 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 identified or even be in existence at the time of its creation; and this is especially so in regard to charitable trust. 
• The trustor can simply specify as the beneficiaries a class of persons (e.g., “my minor children,’’ “my brothers and sisters’’) who are readily identifiable. 
• Thus, a devise of a land to a father in trust for his children lawfully begotten at the time of his death is valid although the father had no children at the time of the creation of the trust. 

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 trusts.

1. Creation. 
• From the viewpoint of the creative force bringing them into existence, they may be either: 
• Express trust  (Arts. 1443-1446.)
• one which can come into existence only by the execution of an intention to create it by the trustor or the parties; or 
• Implied trust (Arts. 1447-1457.)
• one which comes into being by operation of law; 
• this latter trust being either:
1. resulting trust or one in which the intention to create a trust is implied or presumed in law; or
2. constructive trust or one imposed by law irrespective of, and even contrary to, any such intention for the purpose of promoting justice, frustrating fraud, or preventing unjust enrichment.
• otherwise known in American law as a:
• trust ex maleficio
• trust ex delicto, and 
• de son tort
• In other words, a trust intentional in fact is an express trust;  
• one intentional in law is a resulting trust; 
• and one imposed irrespective of intention is a constructive trust. 
• The classification of “voluntary’’ and “involuntary” trusts is sometimes employed in referring to express trusts and implied trusts.
2. Effectivity. 
• From the viewpoint of whether they become effective after the death of the trustor or during his life, they may be either: 
• 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; or 
• Trust inter vivos or “living 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. 
3. Revocability
• From the viewpoint of whether they may be revoked by the trustor, they may be either: 
• Revocable trust
• one which can be revoked or cancelled by the trustor or another individual given the power; or 
• Irrevocable trust 
• one which may not be terminated during the specified term of the trust. 
• 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.

Elements of express trust. 

• Basically, these elements include: 

1. A competent trustor and trustee; 
2. An ascertainable trust res; and
3. Sufficiently certain beneficiaries. 

• The trustee must also have some power of administration other than a mere duty to perform a contract although the contract is for some third-party beneficiary.
• A declaration of terms is essential and these must be stated with reasonable certainty in order that the trustee may administer, and that the court, if called upon so to do, may enforce the trust. 
• Since the trustee takes title to property and administers it, it follows that he must be capable of owning property. 
• Consideration, is not required to establish a trust.

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.

Principles of the general law of trusts adopted. 

• This provision is similar to Article 1432 which adopts the principle of estoppel as known in American jurisprudence. 
• “This article incorporates a large part of the American law on trusts and thereby the Philippine legal system will be amplified and will be rendered more suited to a just and equitable solution of many questions.” 
• Pursuant to Article 1442, it has been held that the question of whether the proceeds from the sale of property held in trust  constitute profits or not within the purview of the internal revenue laws depends upon the provisions of the latter, regardless of the will of the trustor. 
• A trust or a provision in the terms of a trust would be invalid if its enforcement is against the law even though its performance does not involve the commission of a criminal or tortious act. 
• It likewise must follow that what the parties are not allowed to do expressly is one that they also may not do impliedly as, for instance, in the guise of a resulting trust. 

Termination of express trust 

1. Expiration of period fixed.
• Ordinarily, a trust instrument states the termination of date of the trust or the event (e.g., when the beneficiary reaches a certain age) on which the trustor wishes it to terminate.
2. Accomplishment of purpose.
• If the trust purpose (e.g., education of a child) is fulfilled before the date, the trust will terminate; otherwise, on the date specified even when the purpose has not yet been fulfilled. 
• Of course, whether or not a date is expressly stated, a trust will terminate when its purpose has been fulfilled, or has became unlawful or impossible.
3. Mutual agreement of beneficiaries.
• Under some circumstances, the trust may terminate by mutual agreement of all the beneficiaries.
4. Exercise of power to terminate. 
• Under the terms of the trust deed, the trustor, trustee, or someone else may have the power to terminate the trust. 
• Upon termination of a trust, any balance of funds reverts to the trustor or is disposed of in accordance with the instructions contained in the trust. 
• If the trust does not make any provision, they can be distributed to those entitled thereto under the law.