Declaration of Trust upon separation

We have recently encountered a couple of cases where a client has sought to rely on a declaration of trust to protect their interest in a property on separation.

This has unfortunately revealed that in some cases there a lack of understanding as to the purpose and benefits of a declaration of trust. In this blog, we will set out the purpose of a declaration of trust and its effect upon couples who separate from a spouse/civil partner. We will also provide some tips to help you protect your wealth in the event of a separation.

What is a Declaration of Trust?

A declaration of trust is a legally binding document (provided it has been prepared correctly) whereby the legal owners of the property declare that they are holding the property on trust for the beneficial owners. The document sets out the shares in which each respective beneficial interest is held.

There are a number of reasons why people may want a declaration of trust, we have set out a couple of examples below:

1.         Buying property

There is no such thing as a common law spouse or civil partner. Therefore, if you are unmarried or do not have a civil partner then you do not have the same legal protection afforded to those that are married or in a civil partnership on the breakdown of your relationship. For married parties or civil partners, the starting point on separation would be a 50/50 split of assets (albeit this may not be the final outcome). If you are unmarried or do not have a civil partner, then a declaration of trust can set out what share of the property you are entitled to on separation. A declaration of trust can therefore increase the certainty as to how the equity in the property will be divided in the future.

2.         “The Bank of Mum and Dad”

The parties to the declaration of trust do not have to be the legal owners of the property. For example, parents may contribute to the purchase of their child’s first home and want their contribution recorded so that they can redeem that contribution in the future.

A declaration of trust can record all kinds of things such as:

•           The parties’ contributions to the deposits of the property.

•           The parties’ future contributions to mortgage repayments and other outgoings.

•           Each party’s total share of the property.

•           The amount each party will receive on the sale of the property or another specified event.

Depending on your circumstances, if you are not married or in a civil partnership, it may also be worthwhile considering a more detailed deed of trust in the form of a cohabitation agreement.

What happens to a Declaration of Trust upon divorce or the dissolution of a civil partnership?

A declaration of trust is affected by the Matrimonial Causes Act 1973 and the Civil Partnership Act 2004 (“the Acts”). The Acts grant spouses or civil partners a variety of different claims they can make following the breakdown of a marriage or upon the dissolution of a civil partnership.

When the court looks at how to distribute parties’ assets and income upon divorce or a dissolution of a civil partnership, it will have regard to a variety of factors including: fairness, the income and earning capacity of the parties, the parties’ needs, the parties’ standard of living and conduct, to name a few. Therefore, the court can override and depart from what was agreed in a declaration of trust that the parties executed prior to their marriage or civil partnership if it is fair and just to do so. For instance, if one spouse or civil partner cannot meet their future housing needs without breaking away from the trust then the declaration of trust will have little effect.

It is fair to say that whether a court will uphold a declaration of trust will ultimately depend on the factual circumstances of the case. If there are sufficient assets to meet both parties’ needs a declaration of trust would have a better chance of being upheld in the event of a divorce or dissolution of a civil partnership.

We would be especially cautious in respect of declarations of trust relating to the former matrimonial home as the matrimonial home is given special recognition by the family court. This means that a declaration of trust may be more likely to be upheld where it relates to an investment property, for example. However, each case is unique and will turn on its own individual facts.

Top tips

•           If you have a declaration of trust in place and you are planning on getting married or entering into a civil partnership, we recommend that you take legal advice from a family lawyer well in advance of your marriage or civil partnership so that you can understand how the document will be treated by the family court.

•           Depending upon your circumstances you may wish to consider entering into a pre/post-nuptial agreement to seek to protect your interest in a property upon separation. A pre-nuptial agreement would be entered into before your marriage or civil partnership, whereas, a post-nuptial agreement is entered into after your marriage or civil partnership. While such agreements are not 100% legally binding, provided certain guidance is complied with they are more likely to be upheld than not. It is important to take specialist legal advice to determine whether a nuptial agreement is the best way to protect your interests, or whether there may be other options to consider.

Please do not hesitate to contact a member of our Family Team if you would like more information on this topic.