Ordinary folks like many of us often hear about trust funds talked about by the rich and famous. What they are really talking about are living trusts.
When we hear them speak of it, we become curious to know what a trust fund is all about. We’d like to know how much would we need if we were to set up one for our own children. We’d like to find out if this is a good way to plan at all.
I have also been curious about trust funds myself because I have three young kids to provide for. I want them to have a bright future and I thought that if trust funds is the best way to do it, I’ll have to know more about what these funds are and how they work.
What is a Trust Fund?
First of all, let's understand what a trust fund is. A trust fund is a sum of money or assets that we entrusts to a third party (as the Trustee) so that they will carry out our wishes of distributing it on a specified later date to our beneficiaries.In principle, it’s very similar to a will but with some differences. Whereas a will is executed when the owner dies, a living trust can be in effect during one’s lifetime and after death.
Also, a living trust would entail that the trustee will manage the trust fund before and during its distribution while for a will, there is no such agreement.
Living Trusts in the Philippines
Since a trust fund needs to be actively managed, it will be more expensive than a will. In the Philippines, most commercial banks offer living trust services if you search through their websites. (So you wouldn't really need to hire a lawyer if you want one.) But only a few banks actually publish how much is it that you will need to start a living trust fund with them.Two of the banks that do are Philippine National Bank (PNB) and Banco de Oro (BDO). The minimum amount required by PNB is P100,000 as initial participation and maintaining balance. There’s no mention of fees and other details. These are items that need to be discussed with the bank during consultations.
BDO, on the other hand, have two Living Trust Account products showcased in their website. The Wealth Builder and the Wealth Planner. Both require quite a significant sum to get started - P1M and P5M, respectively. They charge 0.5% of the fund per year and invests the asset on government securities and other fixed-income instruments.
Interest income of the fund is generally subject to 20% withholding tax. Although some funds may be exempted from taxes if these are invested in qualified tax-free securities with maturity of at least 5 years and held in the fund for at least 5 years as well.
Is a Living Trust a Good Idea?
So you may be thinking, if you already have a will in place and you can do your own investing, is there still a need for you to setup a living trust for your kids or other beneficiaries?There could be several reasons for this. You may want to avail of the tax-free incentive on some of the living trust accounts offered by banks mentioned above. More importantly, you may also want to protect your wealth (its investment and its distribution) by planning your own incapacity to do so yourself maybe due to possible health issues or accidents later on.
Some would also look at their estate and see that if they pass on their wealth to their loved ones, it would cost the property a significant amount on taxes. They may opt to set up a trust fund to lessen this tax burden as well.
A Word of Caution
Different people have different circumstances so we can’t generalize on what would be the best thing to do for everyone. Financial planning experts should be able to help those who are really serious about getting this done right for them to address their specific needs.Nonetheless, it wouldn’t hurt to know that living trust funds exist in the Philippines through banks. Even if you are not super rich, you can use them depending on what financial or estate planning objective you want to achieve. This information is not all there is to it but it’s a way to start learning.
*Photo Credit: Certo Xornal (Creative Commons)
