Professional Documents
Culture Documents
In the UK
A shared appreciation mortgage is a mortgage arranged as a form of
equity release. The lender loans the borrower a capital sum in return for
a share of the future increase in the growth of the property. The
borrowers retain the right to live in the property until death.
Shared Appreciation Mortgages sold between 1996-1998 have not
always turned out to be products beneficial to the borrowers who took
them out. In the late 90s, Barclays Bank and the Bank of Scotland sold
about 11,000 shared appreciation mortgages, targeting pensioners, just
before the sharp rises in the property market. Customers could borrow
the equivalent of 25% of the value of their property interest free. The
banks gain from receiving 75% of the increase in value of the customer's
property once it is sold.
The last ten years have seen property prices increase by 3 to 4 times.
Many customers who took out a shared appreciation mortgages now find
themselves trapped.
An example : a property valued at £100,000 in 1997 is now worth
£400,000 (2007). The client took out a SAM of £25,000 (or 25% of the
1997 value). The contract stated that, upon sale or death, the banks could
claim 75% (3 x 25%) of the difference in value plus the original loan
(75% x £300,000 + £25,000 = £250,000). Therefore the bank will
receive, upon sale, £250,000 (62.5% of the current value) and the client
£150,000. The problem arises when the customer wants to sell up and
move home. With only £150,000 to play with, even downgrading to a
smaller property half the size of their current house would cost £200,000
and as such would be unaffordable.
Thus, in a market where house prices are rising in the long-term, this
type of deal is usually detrimental to the customer. On the other hand, if
a customer took out a SAM and house prices stayed steady or declined,
the customer would effectively have a completely interest free loan with
no downsides. On a 10 year mortgage of £100,000 at 6%, the customer
would save £33,225 in mortgage repayments with no loss to the
customer.
Many disgruntled SAM customers have got together to form the Shared
Appreciation Mortgage Action Group (SAMAG). They hope to find a
legal settlement for "victims" of shared appreciation mortgages and are
pursuing legal remidies.
Contingent cooperator
In game theory, a contingent cooperator is a person or agent who is
willing to act in the collective interest, rather than his short-term selfish
interest, if he observes a majority of the other agents in the collective
doing the same. The apparent contradiction in this stance is resolved by
game theory, which shows that in the right circumstances, cooperation
with a sufficient number of other participants will have a better outcome
for cooperators than pursuing short-term selfish interests
Beneficiary (trust)
In trust law, a beneficiary or cestui que use, a.k.a. cestui que trust, is
the person or persons who are entitled to the benefit of any trust
arrangement. A beneficiary will normally be a natural person, but it is
perfectly possible to have a company as the beneficiary of a trust, and
this often happens in sophisticated commercial transaction structures
With the exception of charitable trusts, and some specific anomalous
non-charitable purpose trusts, all trusts are required to have ascertainable
beneficiaries.
Generally speaking, there are no strictures as to who may be a
beneficiary of a trust; a beneficiary can be a minor, or under a mental
disability (in fact many trusts are created specifically for persons with
those legal disadvantages). It is also possible to have trusts for unborn
children, although the trusts must vest within the applicable perpetuity
period.
Categorization
There are various ways in which beneficiaries of trusts can be
categorized, depending upon the nature and need of the categorization.
From the perspective of the trustees' duties, it is most common to
differentiate between:
• fixed beneficiaries, who have a simple fixed entitlement to income
and capital; and
• discretionary beneficiaries, whom the trustees must make decisions
as to the respective entitlements.
Where a trust gives rise to sequential interests, from a tax perspective
(and also from the point of view of trustee's duties), it is often necessary
to differentiate beneficiaries sequentially, between:
• those with a vested interest, such as tenants for life; and
• those with a contingent interest, such as remainder men
Taxation
Main article: Taxation of trusts
Tax planning usually plays a considerable role in relating to the use of
trusts.
Historically, whilst the courts have been fairly amenable to the use of
trusts in tax planning, as tax planning schemes have become more
aggressive, so the courts have increasingly taken a restrictive view of the
tax treatment of trusts.
Although individual countries tend to have very detailed rules about the
taxation of trusts, the three mechanisms whereby taxation is usually
assessed is by either treating (i) the trust as a separately taxable entity in
its own right, (ii) treating the trust property as still the property of the
settler, and (iii) treating the trust property as belonging absolutely to the
beneficiaries. Some jurisdictions apply different combinations of the
rules in income tax, capital gains tax and inheritance tax.
Beneficiaries' powers
Because an interest under a trust is a species of property, adult
beneficiaries of sound mind are able to deal with their rights under the
trust fund as they could with any other species of property. They can sell
it, assign it, exchange it, release it, mortgage it, and do most other things
that they could do with a chose in action.
If all of the beneficiaries of the trust are adults and of sound mind, then
they can terminate the trust under the rule in Saunders v Vautier, and
require the trustees to transfer absolute legal title to the trust assets to the
beneficiaries
Eisner v. Macomber
Eisner v. Macomber, 252 U.S. 189 (1920), was a tax case before the
United States Supreme Court. It is notable for the following holdings:
• a pro rata stock dividend, where a shareholder received no actual
cash or other property, and retained the same proportionate share
of ownership of the corporation as was held prior to the dividend,
was not taxable income to the shareholder within the meaning of
the Sixteenth Amendment
• An income tax imposed by the Revenue Act of 1916 on such
dividend was unconstitutional, even where the dividend indirectly
represented accrued earnings of the corporation.
Contingent commissions
There is a big difference, however, between insurance agents and
brokers. Agents have a fiduciary duty to the insurance company, brokers
have a duty to the insurance purchaser. This difference leads to unclear
criticisms of contingent commissions as encouraging conflicts of
interest. The conflict is relevant for brokers, not for agents.
Criticism of broker contingent commissions is based on the fact that they
are structured so that insurance companies compete (among brokers) on
the fee paid to the broker rather than the price to the buyer. This creates
a conflict of interest for the broker influencing him to recommend his
customer to place his business with an insurer who offers a higher level
of contingent commission to the broker. Another criticism is that the full
brokerage commission is not necessarily disclosed to the buyer, who
therefore has less knowledge of the broker's incentives.
The practice of Overrides has been defended on the basis that payments
are made based upon the whole book of business that a broker places
with an insurer and not for individual cases; and that the practice is
intended to compensate brokers for activities carried out on behalf of the
insurer, rather on behalf of their customers (for which they receive
brokerage or fees).
In 2004 New York Attorney General Eliot Spitzer led an attack on the
contingent commission practices in the U.S.A. insurance industry,
though the fallout from his investigations Contingent commissions is a
term used in the American insurance industry for any kind of
commission which is contingent upon some event occurring (instead of a
commission paid on the sale itself). In the UK this form of payment is
known as Overrides.
Theoretically, this term could apply to any type of industry. An example
from the mortgage brokerage industry would be if the brokers'
commission depends on the borrower continuing to repay the loan,
rather than being paid in a lump-sum when the loan is issued.
Conceptual history