Family Trust over Property – Mortgaged – Releasing Equity  

One of the things we’re often asked about is “Can I put a mortgaged property in trust?”. In this new series, we’ll explore different case studies and applicable scenarios to answer these burning questions.

The Case Study of Geoffrey and Hillary Smith

• 2 Arcacia Avenue, Grantham, Lincolnshire, GR6 8PB
• Property value £200,000
• Mortgage with Halifax £70,000

Geoffrey and Hillary have a mortgage over the property so the legal title to the property cannot be transferred to the trustees. The equitable title is what is held under the trust.

Their Trust was set up on 30 July 2014.

The trust protects the equity in the property. As the mortgage is paid, the equity in the trust grows until eventually, the whole property forms part of the trust. At this point, the Settlor and Trustees will apply to have the legal title changed into the names of the trustees.

How does this trust protect the property with a mortgage on it?

The trust, along with the restriction protects the equity in the property. As the mortgage is paid, the equity in the trust grows until eventually, the whole property forms part of the trust. At this point, the Settlor and Trustees will apply to have the legal title changed into the names of the trustees.

Scenario 1

Geoffrey and Hilary did not envisage being in such dire financial difficulty and wish to release equity in the property, can they do this and if so, what are the implications?

First step – look at the Trust Deed

The Settlors cannot just take equity out of the Trust without referring to the Trust Deed and, liaising with the trustees.

Are the Settlors beneficiaries? If not, they will need to effect any powers they have to add beneficiaries to the trust to add themselves, then the trustees could exercise their Power of Appointment. This clause is used to appoint trust assets out of the Trust for the benefit of any beneficiaries, on such terms as the trustees think fit.

The above clauses confirm that the trust asset can be appointed out to one or all the beneficiaries and this must be documented by deed. Generally, a Deed of Appointment; it is also prudent to undertake Minutes of Trustee Meeting.

Second step – Land Registry Title updated

Land registry work may be required to remove any restrictions relating to the trust.

Implications

• Could dilute the protection of the trust for example, if the client becomes bankrupt, enters care, divorces or becomes insolvent and the Settlor has taken equity and then placed the property back into trust it could be seen as a ‘personal piggy bank’ and the trust could be set aside.
• Lifetime Trusts should be a permanent and irrevocable lifetime planning strategy. If a client has any doubts as to their financial position or intentions of taking future equity release, then maybe the lifetime trust is not a suitable protective vehicle.
• If, however, the clients have fallen upon hard times financially then equity, as a last resort, can be released by the Settlor/s appointing the trust property back to themselves (as beneficiaries).
• While it is possible to place the equity of a mortgaged property into trust, should the Settlor later wish to remortgage the property they would need to declare the existence of the trust to the lender at that time. The lender would be unlikely to agree to the remortgage unless the trust is ended, and the equity placed back into the Settlor’s name. Where a remortgage is likely to be required, a lifetime trust may not be suitable planning.

To speak to us about how we can help, please get in touch with the office directly or contact your case manager direct.