However, the potential for conflict around the house purchase if they decide to go their separate ways, is huge. It is therefore crucial to ensure that any division of assets is spelt out at the very beginning when the mortgage is taken out. The way to do this is through a Declaration of Trust.
While putting a Declaration of Trust in place is the role of a solicitor, it is helpful for mortgage brokers to understand what it is and why it is necessary.
When advising unmarried couples or a group of friends buying together, also referred to as “tenants in common”, brokers should be aware their clients are likely to need a Declaration of Trust – and who to refer them to.
What is a Declaration of Trust?
A Declaration of Trust defines the legal split of the property and is a vital tool for defining the rights and obligations of the co-owners. It comes into its own when people either go their separate ways or establish how the property is legally owned, i.e., as Tenants in Common.
This will then ensure the right of survivorship does not apply and instead the co-owners can create a will to establish how their share of the property is distributed. So, it can save a lot of stress in the future.
While its content may vary, it typically outlines the proportion of ownership, initial and ongoing financial contributions, and the obligations of each party. It will cover what share of a deposit each person has put in and what that means for overall ownership.
A Declaration of Trust outlines the mechanisms for resolving disputes and prevents one party from unfairly benefiting at the expense of others. This is particularly important when the co-owners make unequal contributions or intend to distribute ownership in a unique manner.
It can specify the proportional ownership and define how the proceeds will be distributed upon sale, reflecting the initial investments made by each party. Without such a declaration, disputes and uncertainties may arise regarding the distribution of proceeds upon sale or if one of the co-owners dies.
What happens when one party passes away?
In the unfortunate circumstance that one party passes away, a Declaration of Trust can play a pivotal role in protecting the investment of the surviving party or parties.
Many people believe – wrongly – that if one party dies then their share of the home will automatically pass to the other person, especially if they are part of a long-standing couple or have children together. But this is not the case and without a Declaration of Trust to establish a Tenant in Common legal ownership and a will in place, the deceased’s share will instead pass in accordance with the intestacy rules, which may not reflect their actual wishes.
As Tenants in Common, the co-owners’ share in the property can be distributed in accordance with the terms of their will, so it is also vital that a will is created as well, so they can ensure their share of the property is distributed as they wish. This may be the other person they own the home with – or someone else.
This minimises confusion and potential disputes – during what will already be a challenging time for loved ones.
A Declaration of Trust acts as a shield, safeguarding the investments of multiple parties in a property. It achieves this by outlining the process for resolving conflicts and reducing the risk of financial loss or harm to any party involved.
Whether it’s defining shares, protecting interests in the event of death, or safeguarding investments, Declarations of Trust are indispensable tools in the property market, providing the foundation for secure and mutually beneficial co-ownerships.