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What is a Declaration of Trust for Property?

A declaration of trust explicitly sets out the proportions of ownership, the trustees’ duties, and the rights of beneficiaries concerning a property or asset.

This declaration is vital for clarifying legal ownership and ensuring that the property is managed and distributed according to the settlor’s intentions, providing a safeguard for all parties involved and upholding the principles of equity and trust law.

In this article, you’ll learn more about these types of trusts, whether they’re necessary, and how you can obtain one.

Property going into a trust

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    What is a Declaration of Trust for Property?

    A declaration of trust for property is a legal document that formally records the financial interests and responsibilities of parties involved in the ownership of a property. It serves as a clear statement of how the property is held between the co-owners and outlines the proportions of ownership, which can be particularly useful when the parties have contributed different amounts to the purchase price or associated property costs.

    This document is important when a property is owned jointly, as it serves to protect the interests of each party and establishes a legal framework for resolving any disputes that may arise concerning the property.

    It becomes a reference for how proceeds should be divided in the event of a sale and can also cover how any profits or losses from the property are shared.

    In addition to defining ownership shares, the declaration of trust can specify how ongoing financial obligations, such as mortgage payments, insurance, and maintenance costs, are divided.

    This is especially crucial when owners have differing financial situations or when contributions to the property’s upkeep and improvement vary.

    The document can be created at the time of property purchase or at a later date, allowing for flexibility in property ownership arrangements.

    Understanding Declarations of Trust

    A Declaration of Trust, commonly found in property transactions, establishes the legal ownership and associated rights between multiple parties. It plays a vital role in clarifying the financial interests and responsibilities relevant to the property.

    A Declaration of Trust, also known as a Trust Deed, is a legally binding document that clearly articulates the ownership share each party has in a property.

    Its main purpose is to outline the proportions of ownership, financial contributions, and how proceeds will be divided upon the sale of the property. It serves to prevent disputes by setting out the beneficial interests in a transparent manner.

    The governance of a Declaration of Trust falls under the Trust Law in the United Kingdom, where it must comply with the Trustee Act 1925 and subsequent amendments.

    Trustees are legally obligated to manage the property per the terms specified in the Declaration of Trust.

    The document must be legally drafted and is often executed in the presence of a solicitor to ensure validity and enforceability. It should be registered with the Land Registry when it relates to a registered property.

    When is a Declaration of Trust Necessary?

    Here are some examples of when a Declaration of Trust might be necessary:

    Property Purchase: John and Sarah are not married but wish to purchase a house together. They contribute unequal amounts to the down payment and decide to split the ownership of the property according to their contributions. A Declaration of Trust can specify the proportion of the property each person owns and how future profits or losses will be divided if the property is sold.

    Investment Properties: Suppose John has more capital and wants to invest more in a buy-to-let property than Sarah. They can use a Declaration of Trust to state their respective shares in the property, which might be different from the legal title proportions, and set out how rental income and expenses will be divided.

    Inheritance: Sarah inherits a sum of money and decides to use it to pay off a portion of the mortgage on the couple’s jointly owned home. To ensure that her contribution is recognised, they might create a Declaration of Trust to reflect Sarah’s increased equity in the property.

    Protection of Contributions: John receives a financial gift from his parents to be used as a deposit on the couple’s first home. To protect this contribution in the event of a separation, they might decide to record this in a Declaration of Trust to ensure that John’s parents’ contribution is returned to him before any remaining equity is divided.

    Did you know?

    Cohabitating couples need to know their cohabitation rights when either moving in with a partner or buying a house together. As we’ve outlined in this article, your rights as unmarried couples are markedly different, therefore, meaning the protection of certain assets becomes even more important.

    Creating a Declaration of Trust

    When creating a Declaration of Trust for property, it is essential to clearly outline the terms on which the property is held by the trustees. This document serves as a formal record of the agreement between parties.

    The key components of a Declaration of Trust include:

    • Trustees: The individuals or entities who will hold the property in trust.
    • Beneficiaries: Those who will benefit from the trust’s terms.
    • Trust Property: A detailed description of the property subject to the trust.
    • Trust Purpose: The specified reason(s) for which the trust is set up.
    • Proportions: If applicable, the proportions of ownership or interest each beneficiary holds.
    • Responsibilities and Powers of Trustees: Any obligations, duties, and powers granted to the trustees.
    • Duration of Trust: The term for which the trust is to be maintained.
    • Drafting the Document.

    How can I draft a Declaration of Trust?

    To draft a Declaration of Trust, one should:

    1. Define the terms and roles clearly to prevent ambiguity.
    2. Ensure that the document complies with relevant legal requirements.
    3. Have the document reviewed by a solicitor experienced in trust law.

    The language used in drafting the Declaration of Trust should be precise and should reflect the intentions of the parties entering into the trust.

    Registering the Trust

    Once drafted, the Declaration of Trust must be registered if it pertains to land or property. This can typically be done by:

    • Lodging the Trust with HM Land Registry.
    • Ensuring that all necessary fees are paid and forms are correctly completed.

    The registration process provides a formal record of the trust on the Land Registry, which is essential for future transactions involving the property.

    Types of Trusts in Property

    When considering a declaration of trust for property, there are specific structures to understand, each with its unique legal characteristics and implications for the parties involved.

    Bare Trusts

    In a bare trust, the trustees hold the legal title to property on behalf of the beneficiaries who have the absolute right to both the capital and income of the trust at any time if they are over 18 in England and Wales or over 16 in Scotland.

    Trustees in a bare trust have no discretion: they must manage the trust’s assets according to the beneficiaries’ directions.

    Key characteristics:

    • Beneficiaries have complete control over the trust’s assets once they are of age.
    • Bare trusts are often used for transferring assets to minors.

    Joint Tenancy vs Tenancy in Common

    A joint tenancy and a tenancy in common are two prevalent forms of property ownership that affect how property is held and transferred upon a trustee’s death.

    • Property is owned equally by two or more parties.
    • The principle of the right of survivorship applies, meaning upon the death of a joint tenant, their interest automatically passes to the surviving joint tenants.

    Tenancy in Common:

    • Co-owners hold distinct proportions, which can be equal or unequal, of the property.
    • There is no right of survivorship; owners may leave their share to a beneficiary in their will.

    Tax Considerations

    Tax implications for beneficiaries of a Trust can be complex, and understanding them is crucial. They must be aware of:

    • Income Tax: Beneficiaries may be taxed on the income generated by the trust’s property, depending on how the Trust is structured.
    • Inheritance Tax: If the trust holds property that forms part of an estate, there may be Inheritance Tax implications upon the death of the settlor.

    Each beneficiary’s tax liability will vary based on the trust deed’s terms and the individual’s circumstances. They should seek professional advice to navigate these tax considerations effectively.

    The Need for Declarations of Trust

    In conclusion, the declaration of trusts for property in the UK is an essential and complex area of property law that ensures clarity and certainty in the ownership and management of property.

    Through the use of trusts, individuals can effectively manage and control the distribution of their assets, protect their interests, and provide for future beneficiaries in a manner that is both legally recognised and enforceable.

    The declaration of a trust provides a formal framework for the expression of the parties’ intentions, helps to prevent disputes, and can offer tax advantages in certain circumstances.

    The legal requirements for creating a trust, including the necessity for a clear intention, the identification of the trust property, and the designation of beneficiaries, must be meticulously observed to ensure the trust’s validity.

    The role of trustees is pivotal, and their duties and powers must be exercised with the utmost care and by the trust deed and the law.

    Mark Keenan - CEO of Divorce-OnlineThis post was written by Mark Keenan. Managing Director of Online Legal Services Ltd. Mark has been writing about divorce and related subjects for over 20+ years and is an expert in legal marketing.

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