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Makoto Arai

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Aging society and trusts

Makoto Arai
Professor of Civil Law and Trust Law, Faculty of Law, Chuo University

1. Utilization of trusts in an elderly society

Experts in a variety of fields have already pointed out the fact that aging in the Japanese society is progressing at an astonishing speed in the world. When considering this fact, it bears no explanation that there is great need to develop and construct legal support systems for the asset management and personal supervision of the elderly. In particular, when considering the dramatic increase of elderly individuals who live alone and require nursing care, this support system should not take conventional family-dependent form; rather, it is preferable to construct a system which utilizes third parties such as professional caregivers and corporate bodies. One example of such effective measures is the Adult Guardianship System (especially the Voluntary Guardianship System) which was implemented as the result of amending civil laws in 2000. However, when taking into account the large scale and diversity of social needs, it would be best to provide numerous support options.

Utilization of a trust system could be an extremely effective measure for asset management in Japan's elderly society. As part of the new Trust Act enacted on September 30, 2007, the use of trusts as an alternative to wills and heir-bequeathing type continuous beneficiary trusts are attracting particular attention as a method of asset management in an elderly society.

2. What are trusts as an alternative to wills?

Allow me to introduce an example of trusts as an alternative to wills. Assets are entrusted to another person and the entruster himself or herself is specified as the beneficiary while living. The entruster's child, spouse or other individual is specified as the beneficiary after death (a beneficiary who obtains the right to receive payments from the trust starting from the death of the entruster). This arrangement uses the trust to achieve asset allocation after death, possessing a function similar to gift on donor's death which seeks to perform post-death asset inheritance based on action taken while still alive.

The use of trusts as an alternative to wills has two main merits. First, it is possible to realize post-death asset allocation based on action taken while still alive. Second, the same results as bequest are achieved by means other than the strict form of a will.

Article 90-1 of the Trust Act defines two ways of specifying terms for the use of trusts as an alternative to wills. The first method is to specify the acquirement of beneficiary rights by a certain individual who will become the beneficiary upon the death of the entruster (Article 90-1-1). The second method is to define that the beneficiary shall receive payments associated with trust assets after the death of the entruster (Article 90-1-2).

3. What are heir-bequeathing type continuous beneficiary trusts?

Heir bequeathing refers to a form of endowment in which, upon fulfillment of a certain condition or passing of a certain period, the asset profit received by legatee No. 1 is transferred to legatee No. 2. There are conflicting academic theories regarding heir bequeathing. The supporting theory states that heir bequeathing is effective as a type of special bequeathing. The opposing theory denies the effectiveness of heir bequeathing, stating that problems exist with legal validity and the heir bequeathing is nothing more than a preference stated by the person who wrote the will. In recent times, the opposing theory tends to be more prevalent.

Article 91 of the Trust Act states that, once 30 years or more have passed since the trust was established, continuous beneficiary trusts similar to heir bequeathing (trusts which specify that, upon the death of the beneficiary, the beneficiary rights possessed by that beneficiary have lapsed and new beneficiary rights are acquired by another individual) is valid until the death of the existing beneficiary who has acquired the beneficiary rights as specified in the trust, or until that right of beneficiary is no longer valid.

By utilizing the heir-bequeathing type continuous beneficiary trust defined in Article 91 of the Trust Act, it is expected that the successor of farmers or small/medium-sized businesses will be able to have a lump inheritance of the assets required to continue that business. This is opposed to the legal portion of legacy rules (inheritance of equal distribution) of civil law.

4. Importance of personal trusts

An important point for future utilization of trusts is to make trusts function as a service which meets individual needs. Inherently, trusts are an individual arrangement and personal trusts should form the core. However, in Japan, group trusts have formed the core of the trust business until now. Unfortunately, this means that personal trusts have not developed sufficiently. When considering the trust business against the background of an aging Japanese society, it would be best to actively shift to the personal trust business field. In order to achieve this shift, in addition to a change in awareness at trust banks which currently handle trust business, it is also necessary to thoroughly discuss reform which includes the regulations of supervisory agencies.

In the case of personal trusts, it is difficult to clearly separate asset management and personal supervision. Indeed, there is no need to do so. It is not necessary for the entrustee to have direct responsibility for the nursing care of the beneficiary. However, to ensure the spread of personal trusts in the future, it is essential to take an attitude of proactively permitting for personal supervision items which are intrinsically related to asset management of the consigned trust. At the very least, through collaboration with the Adult Guardianship System of civil law, there is sufficient possibility of positioning trusts as part of a support system for overall lifestyle, including personal supervision of the elderly individual who is the beneficiary.

5. Operators of personal trusts

Personal trusts are not the core of the trust business and have not developed sufficiently. However, it may be difficult to request a change in awareness at trust banks which currently operate trust businesses. There is a dilemma that personal trust business tailored for the individual may not be profitable.

Therefore, public-service corporations, legal corporations, judicial scrivener corporations and NPOs (specified nonprofit corporations) will attract great attention as operators of the adult guardian personal trust business in the future. Particular attention is being given to the specified nonprofit activities of NPO, which are activities designated by the Act to Promote Specified Nonprofit Activities. These activities are intended to contribute to increased benefits for general public. Therefore, the adult guardian personal trust business meets the criteria of "activities for promoting health, medicine or welfare" which is stated in the aforementioned act. Unlike business corporations, the ultimate goal of NPOs is not profit, so trust fees can be suppressed to a low level. Article 5-2-1 of the Trust Business Act restricts the responsible organization of trust business to business corporations. In other words, NPOs cannot become the responsible organization of trust business. NPOs must receive approval for foundation from government agencies and are supervised by the agencies after founding. There is no reason why NPOs cannot be approved as the operators of trust business. The Trust Business Act should be amended to recognize business corporations, public-service corporations and NPOs as meeting the requirements to apply for licensing and registration of trust business.

Related Literature
  • Makoto Arai "Trust Act (Volume 4)" (Yuhikaku Publishing, 2014)
  • Makoto Arai (edited) "Trust Law Through Keyword List" (Yuhikaku Publishing, 2007)
Makoto Arai
Professor of Civil Law and Trust Law, Faculty of Law, Chuo University
Born in Niigata Prefecture in 1950. Graduated from the Keio University Faculty of Law. Obtained his Doctoral Degree (Law) in the University of Munich in 1979. Worked at Chiba University and the University of Tsukuba before assuming his current position in 2011.
Chairperson of the Japan Adult Guardianship Law Association and Director of the Japan Association of the Law of Trust.
Received the Humboldt Prize in 2006 and the Order of Merit of the Federal Republic of Germany (Grand Cross 1st Class) in 2010.
Current research themes include the reclamation of legal action concepts, the utilization of trust systems in an elderly society, and the construction of theory to promote the use of the Adult Guardianship System.
His main written works include "Trust Act (Volume 4)" (Yuhikaku Publishing, 2014), "Outlook of the Trust System" (co-edited, Nippon Hyoron Sha, 2011), and "Outlook of the Adult Guardianship System" (co-edited, Nippon Hyoron Sha, 2011), and others.