Buy Property Under Trust in Singapore
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Learn more on how you can buy property under Trust in Singapore. What is a Trust and can you use a Trust to avoid paying ABSD? What are the implications?
In Singapore, buying a property can be a headache, especially when we talk about the purchasing of multiple properties. The taxes and duties that the government imposes can be tough to deal with, which is why many people seek workarounds for their property requirements.
One of these workarounds includes buying the property under a trust for your child. A child in Singapore means anyone below 21 years of age.
Let us now look at what a trust is and what the benefits, disadvantages, and motives behind it are that one should know about before taking any step in the property world.
Introduction to Buy A Property under Trust
Additional Buyer’s Stamp Duty (Refer to the link for the new rates that changed on 16th December 2021) was introduced by the Singapore government as part of its property cooling measures. Depending on the nationality of the buyer, and the number of properties owned by the buyer, ABSD could be payable.
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.
In a trust, ownership is divided into legal ownership and beneficial ownership. The legal owner is the person who is registered as the owner of the asset (which could be real estate, shares, or anything else).
We find examples of trusts in everyday life. The most famous example would be the Central Provident Fund or CPF. Under the CPF Act, a Singaporean’s CPF account which is meant for retirement purposes, is held by the CPF Board. The Board is the trustee and the Singaporean is the beneficial owner of his account. This is an example of a trust set up by statute.
Most trusts are created by a branch of law called equity which is based on fairness and justice. Therefore, anyone trying to use trust law must have acted fairly and justly. The courts will often refuse to enforce a trust which is designed to deceive or mislead someone. All readers should note that there are restrictions in the Housing and Development Board Act and the Residential Property Act relating to the use of trust. Consult your lawyer if you have any doubts.
What is a Trust?
A trust is a three-party deal where one party transfers the property to the second party (the trustee) who keeps it for the third party (the beneficiary).
A trust is a legal binding of the law, which makes all the parties legally bound to one another. These parties now enjoy and perform their responsibilities asset in the trust contract.
There are 3 parties to a trust –
a) Settlor – the person putting assets into the trust
b) Trustee (or legal owner) – person managing the assets. He could also be the settlor
c) Beneficiary or Trustor – the person entitled to the benefits of the assets in the trust
What is the role of a Trustee?
A trustee is a party that is fully responsible for managing all the taxes and duties on the property. Therefore, it is usually advised that the trustee must keep a public record of all their payments in the trust.
The trustee should make a habit of keeping all the receipts and records of the payments they make.
A trustee should know that all the income coming from the property, whether it be rents or any sales, are the property of the beneficiary.
A trust account should be opened in a reputed bank so that all the transactions can be easily made, monitored, and checked by the trustee.
Usually, the trustee is the parent of the child who got the property in the first place. Therefore, it is usually a simple flowchart of responsibilities and liabilities that the trust encompasses.
The parent takes care of all the legal and financial needs and assets of the property for the child.
They pay all the taxes and duties duly and keep the trust free of any problems.
What is the beneficiary of a trust?
The beneficiary, as the name implies, is the person that reaps all the benefits of the trust.
The beneficiary, in this case, is the child. The child reaps all the benefits of the trust set up by their parents.
All the income generated from the trust property will be directly under the name of the beneficiary, i.e., the child.
What are the legal rights of a Beneficiary?
To understand the rights of the beneficiary, it is essential to know what types of trusts can be created.
If the trust is revocable, it means that the settlor can change or revoke any items in the trust documents, including the beneficiaries. In such a scenario, the trust beneficiary has very few rights, if any.
A revocable trust can transform into an irrevocable trust after the death of the settlor.
An irrevocable trust is one whose trust content can not be just changed at will. Since, the main party, the settlor, that created the trust is no longer living; no one holds the absolute rights to the trust document.
The contents of an irrevocable trust can only be tweaked under rare events such as a court order rendering a part of the agreement invalid or faulty.
The trust beneficiary of an irrevocable trust has the fundamental right to information. He or she has the right to know and ask what is going on with their trust at any point.
Furthermore, they can ask the trustee the reason for their actions and why a certain thing was done to make sure that the trustee is properly doing their job.
Beneficiaries can further be classified into two categories.
A current beneficiary is the one that enjoys any income that is generated by the trust at the current point in time.
A contingent beneficiary is the one that can enjoy and reap all these beneficiary benefits after the current beneficiary.
State laws also play a role in determining precisely what rights a beneficiary will have.
In any case, a beneficiary enjoys the fundamental rights of payment, right to information, right to an accounting, right to removing the trustee and right to termination of the trust.
When does a trust end?
The trust ends when the child is of the legal age, i.e. 21 years old. The trust can also come to an end when the requirements set in the trust document are met.
Once, the trust ends, the child is now the complete owner of the property, including all of its taxes and mortgages. The child now must abide by these responsibilities under the laws of the state.
Advantages of buying a property under Trust
If you buy property in the name of a beneficiary who otherwise does not own property, then there is no ABSD payable. So for example, father and mother John and Mary decide to purchase an apartment in Bishan in the name of their daughter Joanne, assuming Joanne has no other property, then no ABSD is payable.
VERY IMPORTANT – Joanne, the daughter, could be just 3 years old. It does not matter. Using a trust arrangement, you can buy property for practically anyone. Well, maybe not for your dog or cat but for any human, no matter how young that person is.
As far as the law is concerned, the real owner of the property is the beneficiary and not the trustee.
Another advantage of a trust is that since the courts regards the child as the beneficiary, if the parents should become bankrupt many years after the trust is created, the child’s ownership is safe from the parents’ creditors. The parents would not be able to act as trustees but some other relative could step it. Note 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).
Disadvantage of buying a property under Trust
One major disadvantage of a trust for a child Is that no loans are granted by banks on the property. This is because the law looks at who the real owner of the property is. The real owner is the beneficiary. For a bank mortgage, the real owner must sign the loan documents. Where the real owner is a child, then it is not possible for a child to sign the mortgage. To use legal jargon, the child lacks legal capacity.
This does not mean that no bank loan is possible. It only means that the parents of the child must use other resources to convince the bank to lend money to them. For example, if they own another fully paid property, it might be possible to persuade the bank to take a mortgage over this property in order to obtain a loan to buy another property for their child.
Another disadvantage of a trust is that the trustee is not the owner. A trustee is only a property or asset manager. The real owner of the asset is the beneficiary. This also means that when the child beneficiary becomes an adult and wishes to buy, say an HDB flat, the property in the trust is counted as property owned by the beneficiary. If the beneficiary also wishes to buy another property, then that would be the beneficiary’s second property and thus ABSD is payable.
Content of a Trust
The Trust Deed is the document that spells out the relationship between the Trustee and the Beneficiary. It is usually professionally drafted by lawyers who effect a property purchase.
Some important details the trust deed should contain –
a] Name and identification details of the trustee(s)
b] Name and identification details of the beneficiary
c] Details of the assets under the trust (for real estate, the address of the property and state and country if the property is overseas. For shares, the number of shares as well as the name of the company as its country of incorporation and registration number).
d] Powers of the trustee – They should include wide powers to deal with the assets including renting real estate, selling trust assets and dealing with all legal matters relating to the assets. This also includes the power to sell, manage, rent the property and also to re-invest.
Frequently Asked Questions
What happens when my beneficiary who is now a child later becomes an adult?
Answer – Since your child is the real owner, your child can require that you remove your name on the title deeds and share certificates belonging to your child. In general, major stamp duty (what lawyers called ad valorem) is only payable for changes in beneficial interests. Since your child was the beneficial owner from the start, changing the name of the legal owner involved no change in beneficial ownership. Therefore, only minor amount of stamp duty is payable.
Can I cancel the trust as I am the settlor?
Answer – No, you cannot cancel it as the beneficiary is now the owner. It might be possible to put in a clause in the trust deed giving the settlor the right to cancel the trust but it is very likely that the court will decide that the trust is not a genuine trust. You may also face problems with IRAS.
What are my duties as a trustee?
Answer – The law of equity imposes fiduciary duties on a trustee. One of the most important duties is not to put himself 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. However, if the trust deed allows a trustee to charge fees, the amount should be clearly stated. Trustees should be aware of any income tax implications as regards with such fees. In order to avoid any legal disputes with your beneficiary in future, it would be wise to have a separate bank account for all income and expenses relating to the trust assets.
For example, all rentals should go into this account. Expenses relating to the trust assets, e.g. property tax, etc should also come from this account. Funds from the account can also be used for the beneficiary’s benefit, eg for education and holidays.
Some trustee may be worried about lawsuits from their beneficiaries at a later date. A well drafted trust deed should have an exemption clause which will exempt the trustee for any breaches of duty relating to negligence. It is unlikely however that any deliberate thefts of trust assets could be protected by an exemption clause. MORAL of the story – do not steal your child’s monies or assets.
Can I create a trust for more than 1 beneficiary?
Answer – Yes, you can have more than 1 beneficiary.
Can my beneficiary be an adult? Answer – Yes, this is possible. Trusts are sometime used for adults for tax planning purposes.
What happens if a trustee dies, becomes bankrupt or mentally incapacitated?
Answer – An application could be made to court by another person such as a close friend or relative to be appointed as a replacement trustee.
Can I create a trust over overseas assets?
Answer – The law in different countries differs considerably. If the country was formerly a British colony, then common law would have applied and it is likely that the concept of a trust is recognized. Examples of such countries – Australia, New Zealand, Canada, Malaysia. However, some countries may restrict foreign ownership of real estate and you are advised to consult lawyers in the particular country.
For more information, you can visit IRAS Website to explain more on Trust and Taxes.
How much does it cost to do up a Trust?
Answer – On average is around $5,000 including the trust and conveyance fee. Contact us as we provide special rates for doing a trust and conveyance fee.
Is there any other hidden cost of Trust that I should be aware of?
Answer – No. Trust is a 1 time fee. There is no annual fee. However, do take note that the property tax for Trust is 4% for own stay and 10% for rental. Income Tax (Rental Income – Expenses) is taxed at a flat rate of 17%.
* Common misconception is that property tax for Trust is 17%.
How can I fill in the OTP if I were to buy under a trust?
Answer – In the format (Trustee Name) in her capacity as trustee for Beneficiary. Eg, Mummy name (mummy nric no.) in her capacity as trustee for baby name (baby birth cert no.)
Can we move in to the unit immediately?
Answer – Yes you can. However, do seek my advise for special circumstances.
How often will IRAS audit?
Answer – As and when they deemed required or when there is a red flag. We pride ourselves in helping our clients to give them the right and proper advise.
Can I be a trustee if I currently own a HDB that have not met the 5 years MOP period?
Answer – Acquiring private residential property to hold in trust for another person is not allowed during the MOP and this is an infringement of the Housing & Development Act. HDB takes a serious view of such infringement and will not hesitate to take action against errant flat owners who flout the rules.
Similarly, owners, spouses and essential occupiers of Executive Condominium (EC) units are not allowed to acquire private residential property (including the acquisition of property to hold in trust for another person) during the 5-year MOP of the EC, commencing from the date of issue of the Temporary Occupation Permit (TOP). Doing so would be an infringement of the Executive Condominium Housing Scheme Act.
Instructions for Purchase Under Trust
For cases where the trust is already in placed prior to the issue of the Option
For such cases, please ensure that a copy of the signed and dated trust deed ( together with the stamp certificate) is furnished and signed before the Option is issued.
The purchaser can be reflected as either of the following:
(a) “X (NRIC / Passport) in trust for Y (NRIC / Passport)”; or
(b) “X (NRIC / Passport) as trustee for Y (NRIC / Passport)”.
(whereby Y is the beneficiary).
2. For Cases where the trust is not yet in place (Likely Scenario)
For such cases, we would advise that the following procedure be adopted:
(a) Option should only be issued to individual(s) without stating trust capacity.
(b) Purchaser will make the declaration of trust:
(i) after the Option is issued in his favour; and
(ii) on or before he exercises the Option
and stamp the same (Trust Deed)
Essentially, the date of the trust deed should thus be after the date of the Option, but on/before the date on which the Option is exercised.
(c) When purchaser exercises the Option, he is to write to inform of his exercise of the Option in a trust capacity, and provide copies of the declaration of Trust and Stamp Duty Certificate.
(d) There is technically no need to amend the Sales and Purchase Agreement,
As far as the purchaser and IRAS are concerned, item (b) should be sufficient for the purchaser to address his ABSD, but he should check with our lawyers and/or IRAS in this regard prior to purchase.
What is the most popular motive behind setting up a trust for your child?
The most popular motive behind setting up a trust for a child is avoiding ABSD (Additional Buyer’s Stamp Duty). (We don’t call it evading or avoiding ABSD. I would call it tax efficient strategy)
ABSD means that the buyer has to pay a set amount of tax on every subsequent property they buy after their first one.
These taxes can be a hefty amount. Therefore, no one takes them lightly, and people instead prefer to go around this duty and avoid paying this significant sum of money.
With that being said, it is imperative to note that the government is not amused if it finds out that the trust you created under the name of your son or daughter was just a mere gimmick to evade the ABSD payment.
In such a case that the government finds this out, it has a full legal right to revoke your property, and subsequent consequences are to be faced by the owner.
Therefore, it is strongly suggested that no parent buy property under a trust for their children if their entire motive behind it is a monetary investment for themselves and the child is in no case benefitting from it directly.
What are the disadvantages for the child in creating such trust?
If the trust is not actually for the child, the child will have to face several rather dire consequences.
Since the property will be in the name of the child, the child can no longer apply for an HDB flat in Singapore, since they are already an owner of a personal property here.
Along with that, if they ever want to purchase a property of their own, they will then have to pay the massive amounts of ABSD to the government.
This fact alone defeats the purpose of the setting up of such trust by the parents. The ABSD they escaped for themselves, now finds a way to their child.
What is the most beneficial motive behind setting up a trust for your child?
The most beneficial motive behind setting up a trust for your child is the pure intent of investing in your child’s future.
Money devaluation is an authentic thing these days. During the time the child is born, and when they grow up, the increment in devaluation is exponential.
On top of that, there are needs of the child that must be met, such as the basic needs of a good education, proper upbringing and all the other miscellaneous expenses that come with a child.
This trust can be a perfect way to get the income from, for your child’s needs. The sheer fact of the rents on the property can pay for the child during their primary and secondary education.
When the time comes for their tertiary education, they may need to travel abroad for the proper procurement of good tertiary education.
You can consider selling the property to pay for all of their tertiary education expenses, among other life events that may call the need for such steps.
Another essential point to take into consideration while pondering over the idea of a trust is to see if you, as parents are into a high-risk business.
If you are in a high-risk business that is quite unstable and unreliable, it may be a good idea to invest in a trust for your child.
Consider that the business you were running goes down into ashes. You are now bankrupt, and the legal viewpoints have allowed them to cease all your assets.
In such a scenario, a property that was bought under a trust for your child will be completely safe from the clutches of those companies.
Since the trust deems the child as the owner of the property, you have no right over it, and so that trust property will be completely secure under the name of the child.
What are the risks involved in such trust?
Where on one side, we have a behemoth of benefits for the future of the child, in such a trust, it definitely comes with its fair share of risks and disadvantages that one must take into account before embarking on this journey.
Consider that your child grows up and he has a rebellious tendency in his personality. This could put you in a very unfavourable position. The child now has ownership of hundreds of thousands of dollars worth of property.
They can use this property to take big hefty loans from the banks. Especially if they are the entrepreneur minded type, they may want to invest it all in a not so beneficial business and lose all the money.
This could further lead them to go bankrupt and the bank, in this case, has the legal right to cease the property for itself.
Another risk in such a trust is that if you, as the trustee, fail to pay the mortgage or fail to repay the loans got under the name of this trust, you will lose the credibility of the child for him.
In the eyes of the state, it is the child that is the owner of the property. So, it is the child that has actually defaulted and earned a bad reputation for themselves through outstanding bills and payments.
Information required by IRAS
For additional protection, do prepare these information when doing up a trust. Do consult us if you are not sure.
- Reasons for acquiring the property in the name of the trustee
- Usage of the property
- Relationship between the trustee and beneficiary
Miscellaneous Aspects of a Trust
Many a time, lawyers are actually approached by insecure wives so that they get a fair share of money in the event of a divorce.
What happens is, that if the husband has a trust built under the name of his child, this trust will remain as such even after a divorce.
Therefore, in divorce circumstances where a husband has a second family, this trust will remain as such, and the child will continue to enjoy all of its benefits.
Personal Case Studies That I’ve Encountered
Case Study 1:
Answer – Yes, foreign parents can be trustee for a condo held in benefit of their Singaporean Grandchild.
Case Study 2:
Option 1: Current Property goes to Son via Trust while the couple buy an Investment Property
It is best to invest in a trust if your true intentions are to invest in it for the future of your child. A Trust is best use either for protection for your child or tax efficiency strategy without the ABSD.
In Summary, here are 8 points on why you should buy a property in Trust.
- Excellent Legacy Tool
- A means to provide future needs of child
- Secure a property for the child at today’s prices before it is beyond reach
- To provide for special needs child or those with extravagant lifestyles
- Businessmen with high risks – safeguard against potential creditors or successful professionals
- Divorce – Not subject to division
- “Insurance Policy”
- Simple & Easy to understand investment vehicle against inflation
Buying a property under Trust is part of our wealth system, building your wealth systematically with the right properties using our P.L.U.S System. To learn more about it, click on this link.
If you have further questions or keen to buy a luxury condo in Singapore, feel free to leave a message in the link below and I’ll get back to you.