What is a Deed of Trust?
21 August 2020
A deed of trust is also commonly referred to as a declaration of trust. It is a legal agreement that specifies how property will be held between two or more owners. It also highlights other financial arrangements, like mortgage payments, between everyone who has an interest in the relevant asset. It is essentially used in transactions concerning assets like shares, property and money.
How does a Deed of Trust operate?
The process is quite simple; the legal title of the asset is transferred to a “trustee” by the “settlors.” The settlors are the ones who are creating the deed of trust. The trustees as highlighted previously are the individuals holding the legal title of the property as required by the settlors. The trustee may be anyone; it can be an independent third party or it could be one of the settlors. There is another group involved called, “beneficiaries.” These are individuals who are benefitting from this whole process; it is for these individuals that the trustee is holding the property.
When would one need a Deed of Trust?
A deed of trust may prove to be useful in several scenarios. It is mainly used when a property is being purchased. Some examples of scenarios where a deed of trust would be needed are as follows:
- When two or more individuals are buying a property:-
Usually in the case of married couples or civil partnerships, the proprietary and financial interests of the individuals involved are protected. This is not the case if there is no marriage or civil partnership. Even if the individuals involved in the property transaction are a couple, friends or distant family, such protection would not be extended to them. As a result of this, investments would be at risk. Therefore, it seems safe to draft and execute a deed of trust as it would highlight the financial contributions of the individuals involved in the property transaction.
- When two or more individuals are buying a property and only one of them has paid the purchase price or has paid the majority of it:-
This is a quite common scenario as buying a property can be expensive, and usually one of the two parties involved in the transaction has more finance and capability of funding the transaction. Therefore, instead of the parties making equal contributions towards the purchase price, there are unequal contributions (for example, with A making contributions amounting to 75% of the purchase price and B making contributions amounting to 25% of the purchase price). By making a deed of trust, the parties will be able to highlight their exact monetary contributions and hence, once the property is sold, each party will receive a share of the sale proceeds according to their initial contributions making the transaction and process fair.
- When two or more individuals are buying a property and only one of them has paid the purchase price or has paid the majority of it, but is not contributing towards the mortgage payments:
In this scenario, for example, A has made a 75% contribution towards the purchase price and B has made a 25% contribution towards the purchase price. Additionally, A does not make any mortgage payments. However, B makes regular mortgage payments. Keeping this in mind, the share ratio of 75/25 could be altered on a yearly basis depending on the contributions made by the parties towards the mortgage payments. Moreover, the parties could have an agreement that B would continue to pay the extra mortgage payments until he/she makes up for the difference in the initial contributions. A deed of trust would highlight such transactions and agreements and help parties keep track of their shares.
- When an individual is buying a property and the funds to buy this property were received from the buyers’ parents:
This is also a quite common scenario. In such a situation, the parents of the buyer are making all financial contributions towards the property but in law, the buyer (children) own the house. By making a deed of trust, the investments of the parents can be made safe. It may be the case that the buyer has an agreement with his/her parents that they will pay back the investments over time. Additionally, if a situation arises where the property is sold before the parents were paid back their investments, the deed of trust will protect their interests by ensuring that they receive the relevant share of the sale proceeds.
- When two or more people buy a property and the parents of one of the buyers were involved by making financial contributions and one of the buyers also made more contributions compared to others:
A combination of the above 2 scenarios (No. 2 and 4) can arise at the same time. A deed of trust would highlight the exact financial interests of each party involved.
- If one party already owns a property and another party moves in:
This usually occurs between unmarried couples or friends. For example, a female individual moves in with her boyfriend. She has been contributing to relevant property expenses; such as renovation expenses, mortgage payments, etc. By doing this, the female individual can claim a beneficial interest in the property even though the legal title of the property is not in her name.
- If an individual seeks to give his/her children a property but feels that they are too young:
In such a scenario, a deed of trust would be the best course of action with the children being the beneficiaries and the trustee could be a parent or another family member.
- Other personal situations and reasons:
A deed of trust can be made for many reasons, such as; making a trust for someone who is incapacitated or mentally unfit to handle the property on their own, to pass on assets and property while one is still alive, etc.
What to consider when making a Deed of Trust?
When drafting a deed of trust, one must make sure that the three certainties are present; certainty as to the subject matter of the trust, certainty as to who are the beneficiaries and certainty as to the intention. Furthermore, the following factors should be taken into account when making a deed of trust:-
- How much has each party financially contributed to the purchase price?
- What is the share of each party with regards to the property?
- Does any party have any other rights?
- How much will each party contribute towards mortgage payments?
- What shall happen if one of the parties is deceased?
- How should the property be valued?
- What should happen if one of the parties is declared bankrupt or is divorced?
- If the property is sold, how will the sale proceeds be divided amongst the parties?
- What method of dispute resolution should be adopted if any disagreements arise?
Advantages of having a Deed of Trust
There are many advantages of having a deed of trust and some of these advantages are as follows;
- Makes matters and financial interests clear. Everyone involved in the transaction would be aware of how the transaction was executed, who contributed the most and how will mortgage payments be made, etc. This clarification is especially necessary if there are many parties involved. Without a declaration of trust, there would be confusion as to who has a bigger share in the property or who should be repaid and how much, etc. Moreover, if the property is being sold, there would be even more confusion and disagreements.
- Everyone’s financial and proprietary interests are protected: Since the deed of trust will highlight exactly who contributed how much, the proprietary interests of anyone involved in the transaction will be protected. Additionally, if the property is being sold, it will be clear as to how the sale proceeds should be divided, keeping in mind everyone’s financial contributions. A deed of trust, in this way, would protect everyone’s financial interests. This protection is important as a property is a fairly expensive and huge investment. It would be safer for all parties involved to have a deed of trust highlighting relevant records, even if the parties involved made equal contributions towards the purchase price and mortgage payments.
- Prevents disagreements; When an individual or a group buys a property, the Land Registry highlights them as legal owners of the property; however, the Land Registry does not mention the contributions made by the parties. There may be some disagreements down the line as to who paid what, etc. To prevent these disagreements, it is better to have a deed of trust that will highlight all such relevant factors.
- Protects interests of those individuals living together as unmarried couples; a deed of trust can also help in preventing disagreements in a scenario such as this, where one party already owns a property and another party moves in and makes contributions towards mortgage payments, etc. The latter would have a beneficial interest in the property and highlighting such interest in a deed of trust would not only acknowledge their efforts but also prevent any disagreements should the relationship break down.
- Confidentiality; Compared to a will, a deed of trust is a confidential document and hence allows the individuals involved to maintain their privacy.
- Tax: Transferring property through trusts as opposed to wills, allows one to alleviate the concerns surrounding the payment of inheritance tax.
For more advice on Deed of Trusts, get in touch with one of our specialist solicitors today.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.