THINGS TO CONSIDER WHEN YOU ARE BUYING AN INVESTMENT PROPERTY UNDER TRUST
Sometime last year, when I was doing an open house for a landed property in Bukit Timah,
Mr Tan (not his real name) walked in and expressed interest in the property. The house was an old one and would require considerable amount of work but it was marketed at a fairly attractive price.
Mr Tan mulled over the price for a while then he blurted out," The ABSD is almost a million dollars! I can use this money for the renovation of the house!" He then went on to say," What about buying under my son's name, under a trust?"
Mr Tan was right in the amount of ABSD he has to pay. As a Singaporean purchasing his second property, he will have to pay 12% in ABSD. The asking price of the property was 8 million. That means the ABSD would have been a hefty $960,000! This amount does not even include the BSD which is another 4%. No wonder he was toying with the idea of buying the property under trust.
First of all, what is a trust? A trust is a form of divided ownership where one person is registered as the owner of the property but is supposed to hold it on behalf of another person. Essentially, a trust is a legal arrangement between the trustee and the beneficiary. In the case of buying a property under trust, the settlor(the person putting assets into the trust) is usually the trustee.
When a property is purchased under trust, it belongs to the beneficiary. The trustee is accountable to the beneficiary and is responsible for managing the property for the benefit of the beneficiary.
When a Singaporean buyer decides to buy a property under trust, in their children's name, the biggest advantage is the avoidance of the ABSD assuming their children do not have an existing property in their name.
The ability to save 12% on a particular property purchase is a fairly attractive idea such that many are actually contemplating buying a property under their child's name.
Let us consider this more carefully. In theory, it seems like a good idea. Buy a property under your child's name as an investment, save the ABSD, sell off the property after a few years and pocket the investment gain! Or, keep the property for rental income and enjoy the passive income.
However, things might not be so simple and straightforward!
Let us consider 3 important issues
1). DO YOU HAVE ENOUGH CASH FOR THE PROPERTY PURCHASE?
When buying a property under your child's name, in almost all cases, the buyer is expected to pay in full as the bank will most likely not grant a loan. Why is this so? The law recognises the beneficiary as the owner and not the trustee.The child, being a child, does not have any legal capacity to sign loan documents from the bank.
This actually rules out most people as it is simply not a viable option to cough up a huge amount of cold, hard cash!
My client, Mr Tan, did not realise this and when I mentioned to him that he would most likely have to come up with 8 million cash should he decide to buy the property under trust in his son's name, he was a little taken aback. He told me he needed to consider very carefully.
Okay, even if you are able to come up with the cash, what about opportunity cost? Is it wise to put all your cash into a property? What about taking advantage of the the low interest rates in the market by taking up a loan and using the cash for other investments?
Having to pay for a property in full when buying under trust in your child's name might not be the right strategy for most people!
2) DO YOU INTEND TO GIVE THE PROPERTY TO YOUR CHILD AS A GIFT OR AS AN INHERITANCE?
YES
If your main intention is to buy the property and give it to your child as a gift in future, and assuming you do have enough cash for the property purchase, then, going ahead with the purchase might be a good idea. You will be giving your child a head start when it comes to property investment.
Buying a property today, in 15-20 years time, the property should appreciate in value. Your child would have a nice capital gain on the property and can choose to stay in the property, rent it out for passive income or sell it for a good profit and upgrade to another bigger property.
NO
However, if you do not have the intention of giving the property to your child or you are still undecided, then , there are some issues you need to consider. Assuming you are still renting the property for passive income, once your child reaches the legal age of an adult (21 years old), the child can ask for the property to be transferred to him or her.
Everything the trust does must be for the exclusive benefit of the beneficiary
In fact, your child is entitled to ask for accrued income for the property. Past rents and any investment gains on the property belongs solely to your child, the beneficiary. Your child can ask to move into the property, sell the property or take a loan using the property as collateral.
If this is your retirement planning, perhaps you might want to reconsider! Of course, some might insist that their child will listen to them and not do things against their wishes but I guess it is a risk they will have to take!
Another matter to consider is if your child would like to purchase another private property in the future. He /she will be subjected to ABSD as this new purchase will be considered his/her second property.
In the scenario that he/she would like to purchase a HDB BTO flat, he/she will have to sell of their private property and wait 30 months before they can even apply. As for a resale HDB unit, the purchase can go ahead but he/she must sell the private property in 6 months.
Therefore, your child is most likely to sell off the property if he/she is considering buying another private property, whether it is a private one or a HDB unit. If you have no intention of selling the property, there could be some disagreements.
This is the most crucial part! Do note that even after your child sell off the property, you have no legal right to ask for any proceeds. After all, the property belongs to your child!
SUMMARY
Once the trust is set up, you can't revoke or unravel a trust.
Basically, once you have purchased the property under your child's name, in the form of a trust, you cannot change your mind. There is no revoking of the trust.
One of my clients asked me if he could sell off the property after a few years, make a tidy profit and dissolve the trust. The answer is no. If you do that, the court will see that the main purpose of setting up the trust is to buy properties and sell it for a profit while avoiding ABSD at the same time. It might be possible to put in a clause in the trust deed giving the settlor the right to cancel the trust but most likely, the court will decide that the trust is not a genuine trust. Why?
Most trusts are created by a branch of law called equity which is based on fairness and justice. Whoever that is trying to use trust law must have acted fairly and justly. The law of equity imposes fiduciary duties on a trustee. The most important duty is not to put himself/herself in a conflict of interest position.
This means that the trustee should not make any profit or obtain directly or indirectly any benefit from this trusteeship, even if the beneficiary is your child. The courts will often refuse to enforce a trust which is designed to deceive or mislead someone.
Remember, any rental income or subsequent sale proceeds of the property belongs to the beneficiary which is the child and has to be put back into the trust accordingly. Of course, the trustee, in most cases have the authority to re invest and manage the portfolio of the trust but they should always keep a proper accounting for future references.
CONCLUSION
For buyers intending to buy a property under their child's name by setting up a trust, do consider all the possible scenarios very carefully. If your main reason for doing so is to avoid ABSD, then, you might want to reconsider! Saving an extra few hundred thousand now might potentially give you more problems in the future! Â
If you should like to find out more, please feel free to contact me for a non obligatory 90 min free consultation at 96658596
Having a keen interest and passion in real estate led Caroline to join the real estate industry. An investor herself since 2006, Caroline is constantly learning and upgrading herself through courses and seminars so that she is able to provide meaningful insights to her clients and to help them successfully manage and restructure their portfolios in the ever- changing market conditions.
Caroline strives to be honest, transparent and professional in all her real estate dealings with her clients. She understands that clients need to work with someone they trust, as they will be entrusting their valuable assets to that person. She is known to be trustworthy and reliable and will ensure that her clients’ interests are protected always.
With a strong commitment to client satisfaction and with the support of her teammates from Navis Living Group (Orange Tee and Tie) , she is confident that she will be able to share her experiences and knowledge to assist her clients in making the best decisions for their real estate needs so that they can achieve their desired real estate goals.