SHOULD YOU BUY PROPERTY UNDER TRUST?
Singaporeans have been constantly finding ways to buy properties without getting affected by ABSD and the most popular way is ‘buying under TRUST’. It has become the talk of the town due to an interesting article in The Strait Times back in 2019 with a sensational headline ‘Singapore Parents Skirt Property Cooling Measures by Buying Homes in Children’s names’.
Interested? You might want to firstly learn about the risks involved as once the Trust is set up, you are not able to revoke or unravel it.
What is Trust?
A Trust is a ‘fiduciary relationship’ in which one party, known as a Trustor, gives another party, the Trustee, the right to hold title to Property or Assets for the benefit of a third party, which is the Beneficiary – Investopedia
In a simple explanation, a Trust is established to provide legal protection for the Trustor’s assets and to ensure that these assets will be distributed according to the Trustor’s wishes.
As stated in Section 32 of Civil Law Act (Cap. 43), a Trust can last for up to 100 years. A Trustee can be a trust corporation or a person chosen by the Settlor (owner) to carry out the instructions as stipulated in the Trust; the Trustee has a fiduciary duty to act in the best interest of the Beneficiaries.
n case you are wondering who can be the Beneficiaries, basically they could be anyone the Settlor desires, as such it is not limited to just family members.
Parties Involved in Setting Up A Trust
To set up a Trust, there are 3 parties involved in the Trust Deed known as:
- Settlor, the person putting assets into the Trust. A Settlor can be an individual (at least 18 years old, of sound mind and owner of the proposed trust property) or any corporate entity.
- Trustee, the person managing the assets for the Beneficiary and this person could also be the Settlor. A Trustee can either be someone you can rely upon in making decisions and following the Trust’s requirement or a corporate entity.
- Beneficiary, the person entitled to the benefits of the assets in the trust.
What is The Content of A Trust Deed?
A Trust Deed is a document that clarifies the relationship between the Trustee and the Beneficiary. This document must be professionally drafted by a lawyer who concludes the property purchase.
It should contain these important details:
- The intention to create a Trust.
- Name and identification details of the Trustee(s).
- Name and identification details of the Beneficiary.
- Details of the assets put under the Trust, for real estate would be property address (state and country if the property is overseas).
- Powers of the Trustee, clarifying on how to handle the assets. In property Trust, it would be subjects involved in renting, selling and dealing with all legal matters concerning the assets.
What Holding The Property “On Trust” for The Child Means?
In Trust Deed, when parents hold the property “on Trust” for the child, it means the parents remain as the legal owners of the property and the child become the beneficial owner of the same property.
In this situation, the parent is fully responsible in managing the property for the child’s benefit. The responsibilities include paying the relevant taxes and managing the economic benefit should the property generate income or profit.
As the beneficial owner of the property, the child can call for the property to be transferred to him or her when this child turns 21. Even if the property is sold before then, the sale proceeds would absolutely belong to the child.
A caveat can also be lodged on the child’s behalf to protect the property.
To avoid any possible disputes with the Beneficiary, the parents might want to arrange a separate bank account for income and expenses related to the property. Do take note that funds from the income account can be used for the Beneficiary’s education or even holidays.
In a well drafted Trust Deed there is an exemption clause which would exempt the Trustee for any breaches of duty in terms of negligence. However this exemption clause will not protect any deliberate thefts of the trust assets.
If the Trust Deed allows you to charge fees, the amount should be stated clearly and such fee is subjected to income tax.
Is Buying Property Under Trust A Good Option?
At the end of the day if the purpose is eventually to transfer the property to your child, it could be a good option for some reasons:
- Property prices keep increasing over the years as regardless of market’s ups and downs, the price trend will always be upward. If you can afford ‘now’ why wait until ‘later’?
- If your intention is buying for your child and it is only the matter of time when they will ‘officially’ become the owner of the property, why should you pay the ABSD?
- Buying under your child’s name is actually a good saving or investment plan rather than keeping the funds in banks. In the future, your bank deposits will have lesser value due to inflation while on the other hand property will give you capital growth.
When Will The Legal Title be Passed to The Child?
It is when the child is of full age (adult), under no disability and absolutely entitled to inherit the property as stated in the Trust Deed.
Besides, as the real owner the child can require the parents to remove his / her name from the Title Deeds. Since the child has been the beneficial owner right from the start, only a minor amount of stamp duty is payable as changing the name of the legal owner does not change the beneficial ownership.
If you ask, can you cancel the Trust since you are the Settlor?
The answer is NO, as the Beneficiary is now the Owner. Even it might be possible to insert a clause giving the Settlor the right to cancel the Trust, the court will most likely decide that it is not a genuine Trust. Besides, there is a high chance that you will also face problems with IRAS.
Can Parents Protect Their Interests?
If parents are concerned about undesirable events which might happen to the Beneficiary such as death, a Trust Deed can have more than one Beneficiary as an alternative Beneficiary to protect the asset from failing.
A Beneficiary does not always have to be a child. It is possible to have an adult Beneficiary as Trust is sometimes used for tax planning purposes.
In the event of the Trustee dies, bankrupt or become mentally incapacitated, a relative or a close friend should submit an application to court in order to appoint a replacement Trustee.
What Are The Advantages of Buying Properties Under Trust?
- Trust is immune to claims against an individual.
Having the child as the Beneficiary of the property will safeguard the ownership from the parents’ creditors in the case of bankruptcy or lawsuits. As the court regards the child as the owner, the parent’s creditors are not entitled to touch the Trust property to settle their personal claims or debts. Having said that, under the Bankruptcy Act any gifts within 5 years of a person becoming bankrupt might be cancelled by the relevant bankruptcy official (usually the Official Assignee) hence, a replacement Trustee should be appointed.
- If you still have an outstanding home loan or if the loan tenure exceeds your retirement age of 65, you might need to fork out about 40% in cash for down payment due to a lower Loan to Value (LTV) ratio.
You can get a better financing by purchasing through your child (in this case the child is preferably 30 years old) to be eligible for a 30 year loan tenure as well as 75% LTV. This method is considered to be a legal way as the authorities are aware of it though so far they have not taken any steps to seal the loopholes.
Disadvantages of Buying Properties Under Trust
- The main disadvantage is, you need a much higher cash outlay, in other words hard cash payment to do this. As the law looks at the child as the ‘real owner’ while a child lacks of legal capacity to sign loan documents, you cannot use loan to finance the property purchase. With that being said, if the parents own another fully paid property, they can try to use it to negotiate with banks for a loan by mortgaging over this property and use the fund to buy another property for the child.
- The child may act against this arrangement in the future. As a Beneficiary, the child will face some issues when they become adults and wish to buy their own choice of property. Being a real owner will cause the child not eligible to buy a HDB flat and if they opt for private homes, the purchase will be counted as a second property hence ABSD is payable.
- If you manage to secure a home loan through your adult Beneficiary child but somehow fail the mortgage after a few years, the impact will fall on your child and this will destroy the child’s creditworthiness.
How Much Does It Cost to Set Up A Trust?
The cost of setting up a Living Trust generally ranges from S$5,000 to S$10,000. Aside from that, there is an annual maintenance fee depending on the structure of the Trust and the amount of assets it holds.
For a Standby Trust, depending on the complexity it is usually a one-time payment of S$4,000 to S$5,000 as the property in such trust will only be transferred at the time of one’s death.
Can Trust Property be Any Property?
The types of property which can be held by Trust include not just residential but also commercial properties. Basically, it extends to any property that you legally own. Please bear in mind that those properties under joint ownership need to obtain a written consent from the joint owner.
While HDB can also be a Trust property, the creation of the Trust over a HDB property would require a prior written approval from the Housing Development Board.
After All, Is Setting-Up Trust a Good Idea?
As long as the property is intended as a genuine gift for your child, it should be a good idea.
While you can afford, buy now to lock in lower prices.
Housing prices will always rise in the long run, so it is better to purchase earlier as an ‘advance inheritance’ to your child. It will appreciate in value and ensure your child to have a roof over their head when they turn 21, no matter how high home prices go in the future.
Most importantly, Trust will ensure a smooth transfer of assets when you want to leave a legacy for your child and protect it against the risk of family disputes or even divorce.
It is more difficult to challenge a Trust than to challenge the validity of a will.
Thinking of ‘Property Wealth Planning’ or Considering to ‘Upgrade’ Your Property?
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