What is a Declaration of Trust?

INTRODUCTION

In the realm of estate planning, the subject of property ownership can be complicated, especially if there are several parties involved.

When it comes to your property, there's always scope for confusion, disagreement, and misunderstandings.

In addition, the world changes, people change, and circumstances change.

Your home is more than a living space. It's a significant financial asset. It's therefore vital to protect your share of this asset, especially when you've purchased it together with another family member, a friend, or a partner.

The Declaration of Trust has been designed precisely with this purpose in mind—so that there can be no ambiguity when it comes to the inevitable changes we face in life, our relationships, and our friendships.

This article explains the fundamentals and principles of the Declaration of Trust and outlines how you can use this document to protect your property rights.

THE MYTH OF COMMON LAW MARRIAGE

There is a commonly held belief that if you are a cohabiting couple, you will be protected by what is known as 'common law marriage'.

In reality, this term is a myth under English law.

Unmarried couples and couples in a civil partnership do not have the same legal protections as their married counterparts.

Consequently, there is no guarantee that each party will be treated fairly should your relationship end.

Example: Cohabitation and mortgage

Let's say you are a cohabiting couple, but your name is not on the mortgage papers.

When you think about it, this scenario happens quite often. You or your partner might have a poor credit rating or outstanding debts that make it difficult for you to obtain a mortgage.

In this case, there is absolutely no guarantee that your interests will be considered in the event you separate one day.

Although the Land Registry keeps a record of ownership, it doesn’t take into account individual mortgage contributions. This means that when it comes to selling the property, some stakeholders could find themselves out of pocket without a legal document recording their contributions.

In other words, if there's no Declaration of Trust in place, determining who should be repaid and what and how much they are entitled to once the property is sold may become a lot more complicated.

HERE'S WHERE THE DECLARATION OF TRUST COMES IN

The Declaration of Trust is designed precisely for the example highlighted above.

It prevents this type of uncertainty by explicitly detailing each party's entitlement percentage should the relationship end in the future.

It's a formal, legally binding document that must be drafted as a deed at the time of property purchase.

All parties must demonstrate that they entered into and signed the agreement willingly, fully knowing what it entails. Just so you know, signatures must be witnessed. The document cannot be easily changed.

WHAT SPECIFICS ARE INCLUDED?

The Declaration of Trust protects everyone's interests in the property by explicitly detailing the following:

• Each party's contributions to the deposit on the property

• Each party’s contributions to the monthly mortgage payments (and related expenditures)

• Each party's percentage ownership in the property

• The expected proceeds from the sale of the property

• The expected distribution of the proceeds from any future sale

OPTIONAL CLAUSES

Depending on specific personal circumstances, you may want to include additional clauses.

For example:

• The party paying a more significant portion of the deposit receives a larger portion back on the sale of the property.

• Ownership percentages can also reflect mortgage contributions (in line with changing circumstances and payments).

JOINT TENANTS VS. TENANTS IN COMMON CONSIDERATIONS

Joint Tenancy

When you purchase a property as joint tenants, it is automatically assumed that each party will own an equal share in the property, as characterised by the right of survivorship.

Under the right of survivorship, if one joint tenant passes away, their share of the property will automatically transfer to the surviving joint tenant, under law (i.e., not through a Will).

A Declaration of Trust can detail specific shares and act like a cohabitation agreement in that it clarifies rights and expectations.

Tenants in Common

Unlike joint tenancy, each party holds their own individual share in the property, which can be equal or unequal. There is no right of survivorship.

Key Characteristics of a Tenancy in Common:

• Each individual's specific shareholding is recorded with the Land Registry.
• These specific shareholdings can be passed on in a Will.
• When one tenant in common passes away, the surviving owner does not automatically inherit their shareholding.
• If the deceased shareholder hasn't drawn up a Will, their specific shareholding in the property is subject to intestacy rules.
• If the deceased shareholder has drawn up a Will, their share is transferred to the relatives of the deceased shareholder.

Under a Declaration of Trust

A Declaration of Trust is useful for laying out the precise breakdown of the shareholding in a property.

In a sense, it has the same effect as a cohabitation agreement, where it aims to remove any ambiguity surrounding what happens in the eventuality of a relationship ending.

CAN A DECLARATION OF TRUST BE AMENDED?

As we said at the outset, the world changes, people change, and circumstances change. So, providing all parties agree to modify the document, then it can be amended.

Basic guidelines:

You can draw up a Deed of Variation for small amendments, which can be appended to the original document as additional clauses.

For more significant changes, you should consider re-writing the agreement. A significant change might include a substantial change in the value of the property due to renovations or a partner buying out another person's interest.

A rewritten agreement renders the previous agreement null and void.

WE'RE A COHABITING COUPLE AND NOW WISH TO MARRY

If you are a cohabiting couple with a Declaration of Trust and you get married, the Matrimonial Causes Act 1973 will supersede your deed.

This act stipulates how a court can act when settling any future divorce. It also lays out the court's powers when determining how a property that is owned by the married couple is administered.

If you're a married couple and your divorce reaches the court, it will be up to the court to take into account the declaration of trust as reflecting your intentions. But bear in mind that the court has no obligation to honour the terms that are laid out in the deed.

If you want to remove any ambiguity and ensure greater certainty by overriding the Matrimonial Causes Act's 'default' position, consider replacing your Declaration of Trust with either a prenuptial or postnuptial agreement if you are a married couple.

CAN I WRITE MY OWN DECLARATION OF TRUST?

While you can use one of the custom templates available on the internet, we highly recommend you take specialist advice.

If you'd like some assistance, please get in contact and we can explain the options open to you and refer you to one of our partners in cases requiring specialist advice.

Note:

Please note that this post is for general information only and does not consist special legal or other professional advice.

Should you require specific legal advice, we recommend professional consultation.

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