What is a deed of trust?
A trust deed, also known as a declaration of trust, is a document that establishes a trust. For a better understanding of what a trust entails, please refer to the details below. However, for trust deeds, it is enough to say that it serves as a record of the ownership of an asset. Furthermore, a trust deed can outline the intentions of the involved parties regarding the future ownership of the asset.
When would I need one?
A trust deed clarifies how a shared property or significant asset is owned. This should be done at the time that the asset is acquired.
For example, when a parent helps their child to buy a property and wants to record the money that was paid and protect the parent’s interest in their property.
This is not relevant for a married couple buying a shared property, where a pre-nuptial agreement would be appropriate.
When would it be used?
A trust deed would be used when someone who had contributed to an asset wants to protect the value of their interest in the asset. This could be where there is a dispute as to ownership of an asset, where one of the owners is going through bankruptcy, or in a divorce. For example, where parents contribute towards their son or daughter’s home, and the son or daughter is married, the trust deed can protect the parent’s contribution from going into the matrimonial pot if the son or daughter goes through a divorce and ensure that the parents can recover their contribution to the purchase.
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When would it not be used?
It is important to note that a trust deed would only come into effect where there was some dispute over the ownership of the asset and what contributions had been made. It would otherwise not have any effect and wouldn’t change the ownership of the asset normally.
What can go in a trust deed?
A trust deed will ordinarily record:
Why put in this extra information?
IWhen adding information to a trust deed, it is important to consider who the intended audience is. Typically, the person for whom the deed is being written is a future judge, whether in a divorce, bankruptcy, or other dispute.
At this stage, additional information about the parties’ intentions can provide the judge with insight into their intentions. For instance, contributions from parents towards their children’s home are often viewed by divorce courts as “soft loans,” essentially considered as gifts from the parents to the children and not reclaimable by the parents.
By recording some more details about the intention of the parties this can be avoided.
What are the tax implications?
There are no tax implications of a trust deed of this type except for the normal Capital Gains Tax implications of sale or disposal of any property or asset.
When will the trust deed not be effective?
A court in bankruptcy may disregard a trust deed that is made within the previous three years on the grounds that the trust deed was made to defeat the effect of the bankruptcy. Equally, a trust deed made shortly before a divorce may be disregarded by the divorce court because it was intended to defeat a claim for financial relief.
Additionally, while it is not fatal to the deed that it is made after the acquisition of the asset, the longer the period between the acquisition and completion of the deed, the less persuasive the deed will be.
Percentage or specified sum?
A trust deed can either record the shares that the property is held in or record a specific contribution. This decision is up to the parties involved, and each option has its own advantages and disadvantages. When shares are recorded, the value of each party’s share will increase if the value of the asset increases. However, if the asset’s value decreases, the parties’ initial contributions will not be protected. In the case of an increase in value, there may be Capital Gains Tax implications. On the other hand, recording a specific monetary sum means that this is the amount that will be recovered. This implies that there will be no advantage to the lending party if the asset’s value increases and the money recovered from the sale of the asset will be less valuable due to inflation.
Power of sale?
The trust deed will normally record a mechanism for sale, and record which of the parties can insist that the asset is sold. This can mean that some parties cannot realise their investment when they want and may have to wait sometime. The part of the trust deed that records this will usually provide that where one party wishes to sell their interest in the asset they must first offer the other parties the option to buy it out for full value, but this is discretionary.
Registered or Unregistered?
Where the subject of the trust is land, the trust deed can be registered with the Land Registry which would record the interest in the asset. This would make the trust deed more likely to be recognised on a dispute, although it is not essential.
What if we don’t have a trust deed?
Disputes over property ownership without a recorded trust deed can lead to lengthy litigation. Without a formal indication of the ownership of an asset, the parties would need to prove their intentions in a Court.
This could mean parents having to be joined as parties to their child’s divorce, or litigation to determine the shares in an asset, or the asset being taken by a creditor in a bankruptcy situation. Court cases on trust interests are often long and bitter. Therefore every step should be taken to avoid this possibility.
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