What it means
In the general sense, a trust deed is signed by the person creating the trust, known as the settlor. It names the trustees who will look after the assets, the beneficiaries who will benefit, and the powers and duties of the trustees.
It is the rulebook for the trust. A well-drafted deed covers what assets go in, how income and capital are to be shared, when and how beneficiaries receive money, and what happens if a trustee resigns or dies.
It may also say how investments are chosen and how the trustees are paid. In the United States, a deed of trust is used in many states to secure a loan on property.
Three parties are involved: the borrower, also called the trustor, the lender, called the beneficiary, and a neutral third party, the trustee, who holds legal title until the loan is repaid. If the borrower defaults, the trustee can usually sell the property without going to court.
This is different from a mortgage, where only the borrower and lender are involved and foreclosure often goes through the courts. The trust deed route is generally faster, which is why lenders may prefer it, but borrowers should read the terms carefully because the process is quicker.
A third use is in insolvency, where in some places a trust deed is an arrangement under which a person hands assets to a trustee to repay creditors over time. Because the word covers several different documents, always check which one is meant before relying on it.
The deed should be signed, witnessed and stored safely, and trustees should keep a copy. Some countries require a trust deed over land to be registered, which affects who can see it.
In practice
Real-world examples.
Example
A family sets up a trust deed to hold a rental property for their children. The deed names a trustee, directs that rent be paid into a bank account, and says the property must not be sold before the youngest child turns 25.
Example
A buyer in a state that uses deeds of trust takes out a $250,000 home loan to buy her first flat. The lender is named as the beneficiary and a title company acts as the trustee holding legal title until the loan is paid.
Example
A small business owner who cannot pay his debts agrees a trust deed with his creditors, handing his assets to a trustee. The trustee sells them and pays creditors a share of what they are owed over several years.
Formula
Calculation
Loan-to-value ratio = Loan amount / Property value
A buyer purchases a house for $400,000 with a $320,000 loan secured by a deed of trust. Loan-to-value ratio = 320,000 / 400,000 = 0.80, or 80%.
The buyer's down payment is 400,000 - 320,000 = $80,000, or 20% of the price. If the property later fell in value to $360,000 while the loan stayed at $320,000, the ratio would rise to 320,000 / 360,000 = 88.9%, leaving less cushion for the lender.Case study
Seen in the real world.
Redwood Gate Properties is an illustrative, fictional developer that borrowed $3,000,000 secured by a deed of trust on an office building. The deed named a title company as trustee and the lender as beneficiary.
When a major tenant left and rent fell short, the developer missed three monthly payments. The deed allowed the trustee to start a non-judicial sale after notice, so the lender did not have to file a court case.
The illustrative lesson is that Redwood Gate used the notice period to negotiate. It sold a smaller adjacent plot for $1,100,000, repaid part of the loan and agreed new terms, which avoided a forced sale of the building. The episode showed the developer that the speed of the process left little time to find the money.
Watch out
Common mistakes.
- Assuming a trust deed and a mortgage are identical, when the parties and the foreclosure process differ.
- Thinking the trustee in a deed of trust acts for the borrower, when the trustee is a neutral party with duties to both sides.
- Signing a trust deed without reading how default and sale work, when the timetable can be short.
Questions
People also ask.
What is the difference between a trust deed and a deed of trust?
They are often the same document in United States usage, while in other places a trust deed means the document creating a trust.
Who holds title under a deed of trust?
The trustee holds legal title until the loan is repaid, and then reconveys it to the borrower.
Do I need a lawyer for a trust deed?
It is wise, because the wording governs rights, duties and what happens on default, and rules vary by country and state. An adviser can also explain how the document interacts with taxes, wills and any existing loans.
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