Money Matters: Interests in Property

Allawdocs is psyched to be back with another intriguing series full of important information: Money Matters!

Money and assets are the foundation of trusts - trusts are created so that the beneficiaries receive a benefit from the trust assets. Further, the trustee has the power to engage in dealings with trust money and assets.

So, what type of interests do beneficiaries have in trust assets? If the trustee is expected to put the trust assets to use, how exactly should and can it go about doing it? In this series we focus on these serious Money Matters, and more!

What is an interest in property?

We're going to get the show on the road and talk interests in property. In essence, an interest in property is something that gives the interest-holder rights in relation to that property.

There are several different types of interests in property - including legal, beneficial, security, etc. - each with different implications for how a person may deal with that property.

Legal interests

Legal interests in property are generally the best understood type of interest. A person with a legal interest in some property has legal title/ownership which can be enforced against anyone - that is, 'legal interest' is synonymous with 'ownership'. Considering property such as a house - having a legal interest gives a person rights such as exclusive possession, and the ability to alter, maintain, and otherwise deal with the property.

As you no-doubt know, the legal interest in particular property can be 'shared' between more than one person (co-ownership).

Often, a person (or persons) will have both a 'legal' and 'beneficial' interest in particular property (i.e. ownership of it and the right to benefit from it). In this case their legal title is absolute, or complete. However this is not always the case - the legal and beneficial interest in the property can be held by different people. In the trusts arena, the trustee will hold the legal interest in trust assets, but the beneficiary will (usually) have a beneficial interest in those assets.

Beneficial interests

A person has a beneficial interest in some property if they have the right to receive the benefit of an asset that is owned by someone else. A beneficial interest in property is an 'equitable' interest - not a legal interest, but still an interest that confers rights enforceable in some circumstances.

To have a beneficial interest in some property, a person must have a definite right to receive a benefit. A beneficiary of a fixed (or unit) trust will have a beneficial interest in the trust property because they have a fixed right to receive a specific benefit from the trust assets. However, this is not the case for beneficiaries of discretionary trusts (see below).

It is possible for more than one person to have a beneficial interest in the same property - for example, in a joint venture context, one party may be the legal holder of assets, but all parties to the joint venture have a defined right to benefit from the assets. Each of the parties to the joint venture will thus have a beneficial interest in the joint venture assets. You'll be able to see this in action in our next post!

Beneficiaries of discretionary trusts have an 'expectancy', not a 'proprietary interest'

Beneficiaries of discretionary trusts are a special case. Unlike beneficiaries of fixed trusts, beneficiaries of discretionary trusts have no definite right to a distribution of trust property. This is because distribution of trust property is subject to the trustee's discretion.

As such, beneficiaries of discretionary trusts are considered to have an 'expectancy' that they will receive a distribution, but since the distribution is neither fixed nor definite, they have no proprietary interest (legal or beneficial) in trust property. This impacts the beneficiaries' rights. Beneficiaries of discretionary trusts still have some rights, such as to demand and inspect the trust financial records. However, they do not have rights associated with distribution of the property - i.e. there is no right to demand their distribution once they are of age.

Security interests

A security interest is an interest against some property in order to secure payment of a debt or other obligation. Often it gives the security interest holder the right to take possession of or to force the sale of the secured property if the relevant debt or obligation is not paid.

In real estate, an example of a security interest is a mortgage. To ensure the mortgage can be enforced against holders of other interests in the same property, holders of a mortgage security interest can register that interest (or protect it by registered caveat) on the certificate of title of the property. Registration will occur at the relevant property office of the state.

Security interests are relevant in the trusts context because, at least in theory, a trustee could possibly grant a security interest in trust property or provide a loan of trust funds in return for a security interest in the borrower's property. Whether a trustee legally can do this forms the subject of a coming blog - keep your eyes peeled!

Still interested?

So as we've seen, there are different kinds of interests in property and this affects the interest-holder's rights in terms of dealing with that property. In trusts, the trustee holds the legal interest in trust assets and thus has the ability to deal with them. The rest of this series concerns how a trustee can deal with trust assets.

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