Smashing the nest egg: trusts properties and equity release

Smashing the nest egg: trusts properties and equity release

Many clients may consider placing their property into trust during their lifetime for the purposes of control, protection, mitigating probate delays and fees, and for peace of mind. However, once the property is held on trust, it can be difficult to obtain funds from the property value through re-mortgaging or equity release.

This is because the settlor is no longer the owner of the property: the trustees hold the land for and on behalf of the trust. It is trust property now, and lenders are rarely willing to assist with trust properties. In order to get around this some settlors may ask their trustees to remove their ownership and / or restriction, giving the legal ownership back to themselves so as to allow for the mortgage.

This is fraught with difficulties. The first is that it is up to the trustees, and not the life tenant, as to whether to dispose of the property in this way. They may not be so easily persuaded. Secondly, the trustees lose their safeguards over the registered title by passing the property back to the life tenant: with their title and restriction gone, the trustees’ rights over the equity in the trust property may not be made known to any subsequent conveyancer. If anything should go wrong while the property is in the hands of the life tenant, the trustees may be liable for negligent loss.

Thirdly, the trustees can only consider this route if they have explicit powers to loan or gift to the settlor (as life tenant or discretionary beneficiary). If they do not have these express powers in the declaration of trust, it may be impossible to use trust capital in this way.

Fourthly there can be long-term risks. The trustees have strict duties to ensure that the trust fund value is protected. If the life tenant undertakes a mortgage or equity release scheme which eats up more and more of the equity over time, or if they fail to make payments, the fund becomes jeopardised. The trustees can be personally liable for this loss.

Remember, there are few legal duties for mortgagees in receivership scenarios to sell the property at market value or above: so if payments lapse, they can reclaim and sell the property at a low price just to recover their investment, leaving little or nothing for the trustees, often with no legal redress for the trustees. The beneficiaries, of course, could still pursue the trustees for this loss.

In truth the purpose of these “protective trusts” is precisely that: to protect the equity in the property. These arrangements are not personal piggy banks for settlors. They are important legal arrangements riddled with strict duties and severe penalties for trustees. Expert advice should be sought for property trusts where equity release or re-mortgaging may become a necessity at a later date. Estate planners and clients alike should beware of any arrangement which promises a nest egg which can easily be smashed and guzzled.

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