Should you buy property on trust for your children?

10 Dec 2021

Is buying property on trust a good move?

Singapore is an expensive place to live in, and one of the key concerns is housing. Can you imagine how much of an advantage your children or grandchildren might have, if they inherited property? They would never be burdened with the same 25-year home loan, that many of us spend about a third of our lives paying. One way to do this is to buy property on trust for our children.

Here are some of the main things to know:

Why buy a property on trust for your children?

When you buy property on trust, you are the legal owner of the property – however, you are expected to only be holding on to it for your child. Once they come of age (at least 21 years old, although you can arrange for this to be later), the property will be passed to your children.

There are several benefits to buying a property on trust:

  • No Additional Buyers Stamp Duty (ABSD)
  • Protection from creditors and litigation
  • Ability to set terms and conditions
  • No need for probate when your children inherit

1. No Additional Buyers Stamp Duty (ABSD)

When a Singapore Citizen buys a second or subsequent property, they will need to pay the ABSD.

As of 2021, the ABSD is 12 per cent of the property price or value, whichever is higher, on the second home. The ABSD rises to 15 per cent, on the third or subsequent home.

However, if you buy property under a trust arrangement, it is possible to purchase the unit without the ABSD. This is on the basis that the property is not actually for you, and is to be passed down to your child. As such, it can represent significant savings, compared to buying a second unit, paying ABSD, and then passing it to your children in the usual way.

However, I must clarify that this only works if the property is strictly for the benefit of your child, and not for yourself. If the government decides that you are just trying to avoid ABSD, the trust can be invalidated. This is specified under Section 33A of the Stamp Duties Act (SDA).

For example, if you are trying to buy a condo under your child’s name, and you are obviously benefitting from all the rental income, then you may draw the attention of organisations like IRAS. Be warned that, apart from invalidating the trust, this might be considered a form of tax fraud.

As such, you should only buy on trust purely as a way to benefit your children; not as a sneaky way to evade ABSD. This means, for instance, that any rental income earned from the property should be set aside for your child; you do not have access to it.

This is a complex legal issue, so you need to be guided through it by the conveyancing lawyer (whom you will need to talk to about setting up a trust anyway).

2. Protection from creditors and litigation

When the property is bought on trust, it is protected from creditors. Even if you were to be declared bankrupt, the property cannot be seized – it will go to your children no matter what.

Likewise, you cannot have the house taken from you due to being sued, or other forms of legal entanglement. For all intents and purposes, it is as though it were not your property (i.e., you are only holding it for the beneficiaries, who are your children).

For this reason, parents who are in higher-risk lines of work – such as running their own business – often like to secure their children’s inheritance by buying on trust.

3. Ability to set terms and conditions

Some parents wish to impose conditions on the children, in order for them to receive the property. These can be set in the trust. For example, you may want to specify that the property will go to your eldest child, but on the condition that your spouse can continue to reside there for life.

You simply need to inform the conveyancing lawyer of the desired terms, and they can draw up the appropriate documents.

It is also important to set conditions, to ensure your children do not use the property against your wishes later (see below).

4. No need for probate when your children inherit

When you pass on, the administrative process for your estate can be expensive. Probate may be required – this is a legal process, by which your assets are distributed to the beneficiaries.

Note that even if you have a will, the executor of the will has to apply for a Grant of Probate from the Court, to begin the process. Probate can be expensive, requiring several thousand dollars in legal fees. It can also be very time consuming, requiring several months (in extreme cases, the duration has dragged on for years).

If you buy a property on trust, however, it is passed on to your children without such complications.

Nonetheless, there are some drawbacks to buying property on trust

Some notable drawbacks include:

  • No financing for the properties
  • Your children can do with the property as they wish
  • Legal fees can be high
  • Your child’s ability to buy other properties is affected

1. No financing for the properties

Except for some rare situations (e.g., you are very wealthy and have access to exclusive private banks), almost no lender grants loans for properties bought on trust. You will almost always have to pay for the entire property upfront.

This, in and of itself, means the trust is not great for personal investment; you will see poor cash-on-cash returns, due to the sky high cash outlay. If you buy a property through normal means, the minimum down payment is as low as 25 per cent.

In addition to the lack of loans, note that you cannot tap your CPF monies, for properties bought on trust.

Note that one way to reduce the impact of this is to purchase new launch properties, which uses the Progressive Payment Scheme (PPS). This is because you only pay as different stages of the development are completed. However, it is still beyond the means of most Singaporeans, and hard to justify as a personal investment.

2. Your children can do with the property as they wish

Unless your coveyancing lawyer sets some limits (see above), you cannot stop your children doing whatever they want with your property, once they inherit it.

This could be a dangerous move, especially if the property is the one you are living in. You cannot, for example, stop your children from deciding to sell the property – or from taking out huge loans against it, and living in indulgence. As such, most parents will want the children to be older than 21, before leaving them with such a valuable asset.

3. Legal fees can be high

In most cases, it will cost around $5,000 to $6,000 to set up a trust. The fees can be even higher for complex cases, such as trusts with a lot of terms and conditions. You can shop around for a law firm that charges less; but a trust is never the cheapest way to handle a property purchase.

4. Your child’s ability to buy other properties is affected

Remember that your child will not be allowed to purchase an HDB flat, as they currently have a property held in trust for them. Also, they will be subject to all the usual taxes once they inherit the property. This includes the ABSD; so if your child wants to buy a home other than they one they’re getting, this means paying 12 per cent more as Singapore citizens.

For this reason, you must also carefully consider the age at which your child will receive the property.

For example, say you specify they are to receive the property at the age of 30. What happens if they get married at 25, and want to buy their own place to stay? They might find themselves stuck, and having to rent for the next few years.

These are issues that should be discussed within the family, before you go ahead.

A trust can be a helpful tool to to protect your children

It’s definitely something to consider, for more affluent Singaporeans in high-risk businesses. However, the trust is not a good way to get around ABSD, and make personal investments. If your sole intention is to avoid ABSD, I’d suggest considering other methods like “sell one, buy two”, or purchasing a dual-key units.

Do reach out to me if you need more information on property wealth planning; and follow me on RonChongProperty.sg for the latest news on the Singapore private property market.

 

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