The disadvantages of buying property under trust in Singapore

Buying properties in trust

Table of Contents

With the recent cooling measures, ABSD rates have risen to its new high. Aspiring Singaporean property investors will now have to pay a hefty 20% ABSD on the purchase value of their 2nd property. For a $1.5 million property this can easily come up to $300,000 worth in stamp duties.

This further fuels the impetus for savvy property owners to look for more tax efficient ways to own multiple properties, avoiding the leash of ABSD. Most probably this is the reason that drove you to this article.

In this article, we will touch on all the fundamentals details with regards to buying property under a trust and run through the pros and cons of doing so.

What is a trust?

A trust is a legally binding arrangement created to enable a trustee to purchase and manage an asset on behalf of a beneficiary, in this case your child.

The subtle difference between purchasing a property under a trust versus Buying property using child’s name above 21 lies in the age of your child. Given your child is below the age of 21, he or she does not have the legal capacity to own a property, hence necessitating the formation of a trust instead of a direct purchase under their name.

The formation of a trust typically involves 3 party

  • Settlor, the person who purchased and own the asset, and also the person who creates the trust
  • Trustee, the person who is entrusted with the legal title of the asset and is responsible for managing the asset on behalf of the beneficiary. The trustee can also be the settlor.
  • Beneficiary, the person who is entitled to the proceeds of the trust

ABSD is payable up front when buying property under trust

Throwing in the spanner early before we venture further. The path to ABSD freedom, when purchasing a property under a trust is no longer as straightforward as before.

Since May 2022, the Ministry of Finance mandates a charge of 35% ABSD to any transfer of residential property into a trust, the ABSD rate was further increased to 65% on April 2023.

The 65% ABSD is to be paid upfront, within 14 days of executing the sale and purchase agreement or option to purchase.

ABSD paid is remissable

Now for the saving grace, ABSD remains a dampener from a cash flow perspective. If properly executed, the ABSD paid is remissable and will be refunded base on the following conditions

In the words of IRAS.

  • The residential property is held on trust for identifiable individual beneficiaries only
  • ABSD (Trust) of 65% has been paid
  • The application is made within 6 months after the date of execution of the instrument

As the latter two conditions are pretty straightforward, let’s dive deeper into the first condition.

Let’s break the gist of the first condition down into two parts.

First off, the first condition stipulates that there must be a clear person indicated as a beneficiary, in this case your child cannot be an individual that has yet to be born on the date of trust formation.

Next, the validity of the trust must not be subjected to any further conditions, in essence it has to be irrevocable. There should not be a condition that your child cannot inherit property if he does not attain a university degree.

These conditions are mainly established to plug the loophole of people setting up trust without the true intent of benefitting the beneficiary.

Disadvantages of purchasing a property under a trust in Singapore

With the basics out of the way, it’s a good time to segway into the advantages and disadvantages of buying property under a trust.

Cash intensive

Purchasing a property under a trust requires a significant amount of cash outlay and essentially restricts this option to only cash rich individual.

The cash requirement comes from two fronts.

Firstly, the mandatory 65% ABSD cash payment upfront would mean that a minimum of $650,000 is required to be paid upfront to purchase a property valued at $1.0 million.

Next, as banks assess the eligibility of the loan based on the equitable owner of the property, who is your child. No bank loan can be applicable for a property bought under trust, the purchase would have to be made in full cash.

Lastly no CPF can be utilised for the property as well. This makes purchasing a property extremely cash intensive. All other costs aside, purchasing a $1.0 million property would easily require a cash outlay of $1.65 million.

Your child is now a private property owner

A complication that could arise, when your child grows up is the fact that he is now a private property owner. He will not be eligible for any government housing subsidies or eligible for BTO or EC application if he does not dispose of the property held under trust 30 months prior to application

Similarly in order for your child to be eligible for a resale property, he will need to dispose of the property, 15 months prior to application.

If he chooses to go for a private property, he would have to face similar challenges in ABSD, while holding the property under the trust.

Property will not be under your control in the future.

As your child attains the legal age to own the property, you will lose control over the property.

As the legal owner of the property, your child would have the legal authority to call the shots on when to sell the property, who to rent out the property to. Worst case scenario, there is a possibility that your child can use the property as a collateral and take up a home equity loan, using the money to finance initiatives that you may not be in alignment with.

ABSD claw back pertaining the buying of property under trust

This is an important point to note, if the main intent for creating the trust is to avoid ABSD. Section 33A of the stamp duties act, presents some repercussions that can result in the claw back of the hefty 65% ABSD charges with penalty. if the court suspects that the trust was created with the sole intent to avoid tax.

Who should consider setting up a trust to purchase a property ?

Having run through the pros and cons, it is clear that purchasing a property under trust is not for everyone. Financial consideration aside, if the main intent of purchasing a property under a trust is to minimize ABSD, there could be other methods to avoid ABSD that can be less inhibitive.

However, if your intent is centred around succession planning, asset protection and you got the financial means to do so. Let’s proceed further into the sections below to understand the nuances of setting up a trust.

Advantages of purchasing a property under a trust

Asset Protection

Relevant to parents with professions that face significant business risk or professional risk. A trust provides a safe harbour for the property, protecting it from creditors in case of bankruptcy and legal claims when faced with professional negligence.

The kicker to this is that, under the Bankruptcy Act, the asset must be transferred into the trust for more than 5 years from the point of bankruptcy. Any shorter duration, could render the asset to be clawed back from the trust by the relevant bankruptcy official.

Similarly, the trust offers the same protection to the property under the unfortunate situation when a divorce takes place. The property remains fully owned by the child.

Succession planning

Purchasing a property under a trust can be seen as an advantageous gift to your child. Helping him evade the rising property prices and getting a head start in private property ownership.

From an insurance perspective, having a property under a trust can also be seen as creating an insurance policy for your child. In case of unfortunate demise of parents, the child will have a rental income generating asset to support his living expenses.

Tax efficiency

If you fall into a high income bracket, any income generated from your properties will add to your taxable income. By placing a property under trust, the taxable rental income will be accrued to your child and taxed based on his income bracket, reducing your overall taxable income.

Is buying property under trust the best method to purchase 2nd property ?

For most property owners whose objective is to purchase their 2nd property while avoiding ABSD, there are other methods that provides greater capital efficiency and control over buying property under trust.

Consider Decoupling Property

Decoupling property is a the default go-to options for families looking to purchase their second property for both investment and lifestyle upgrade purposes.

Assuming both spouse are working and earn a reasonable income, it allows full 75% leverage on both properties. As compared to buying a property under trust, which require one to pay the entire purchase price of the property in cash, the decoupling property is a much less cashflow inhibitive method.

From control and flexibility standpoint, the property remains under direct control of both husband and wife, even in the unfortunate case of divorce, the property ownership remains properly accounted for. Unlike the option of buying a property under trust, you would have to deal with funds being exclusively locked within the trust account and not having direct legal ownership over the property and the capital infused in it.

Consider Sell One Buy Two

On the similiar note, a sell one buy two strategy will allow for a much more deployment of capital as compared to purchasing a property under trust. Assuming have got the cash on hand to purchase property under trust and you will to redeploy into two properties with leverage, you will have the option to procure much higher quality real estate.

Who is suitable for buying property under trust in Singapore

Having harp on the disadvantage of buying property under trust, there are scenarios whereby it makes sense to adopt this approach. Under the situation that follows, buying property under trust got be a suitable strategy for you.

  • Both husband and wife are already holding properties under their name
  • You are looking to purchase a third property and have sufficient cash on hand
  • Asset progression is a priority for you
  • Both you and your spouse work in high risk occupation that requires asset protection

The role of a trustee

It helps to shed a little more light on the duty of a trustee.

The trustee is entrusted with the responsibility to manage the property on behalf of the child and will be held liable for any mismanagement of assets.

The trustee will be responsible for paying relevant taxes and duties for the benefit of the child. And any economic proceeds derived from the trust asset must be accrued to the child.

Hence, It is critical to keep good records of all income and expenses moving in and out of the trust. Typically, a trust account is set up with a reputed bank to facilitate the tracking and monitoring of all funds moving in and out of the trust.

Can trustees sell property held in trust ?

Under the trustee act, the parents will be conferred the power to sell the property held in trust to advance the benefit of the child who is the beneficiary. However, proceeds must be funnelled back to the trust account and can only be withdrawn by the beneficiary himself.

Who cannot be trustees ?

As a trustee, you will hold a legal interest in the property held under trust. This brings about complications when you are an existing HDB property owner or is interested in purchasing a HDB or EC down the road.

If you own a HDB or EC and is still serving the 5 year minimum occupancy period, you are not allowed to hold a legal interest in another private property. Hence, this precludes you from becoming a trustee.

Similarly, this is applicable to Singaporean permanent residents who own a HDB. You are not allowed to own a HDB and a private property, becoming a trustee would require you to dispose of your HDB

How to set up a trust to purchase a property ?

A trust is established by the execution of a trust deed, also known as a deed of settlement. It is executed between the settlor, the person owning the asset and the trustee, the person managing the asset.

The asset is then transferred into the trust.

By executing the deed of settlement, the following key terms would need to be specified

  • Who is the beneficiary
  • Who will be appointed as trustee of the trust
  • The power of the trustee
  • And what powers the settlor wishes to retain

The cost of setting up a trust

There are many different types of trust, within each type of trust, different terms could be specified. The legal cost of setting up a trust increases as the complexities of the trust increases.

Legal cost ranges from $3500 to $20,000

  • Here’s a indicative price list from different law firms
  • YY Lee – From $2,000
  • PKWA Law – From $3,990
  • Tembusu Law – From $4,500

What properties can be bought under trust ?

Both private properties and HDB can be purchased and held under trust. But special approval is required from HDB if a HDB were to be transferred into the trust.

More reads, more gains ?

Kudos on making it this far. The fact that you have invested the last 5 mins reading this article. We believe you are a like minded real estate investor looking to beat the rat race by getting more out of your real estate investment.

If so, do check out the following articles.

Author

  • Jue Wen

    Jue Wen is the content marketing lead. This means he spend his waking hours researching and writing all things real estate. He believes life is a hustle and there is no joy in grinding away daily in our little rat races. He believes making wise moves in real estate investment can be a game changer. Aside from writing all things real estate, you can find him in your nearest bouldering gym.

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Jue Wen

Author

Jue Wen is the property analyst and content marketing lead at decoupling expertise.
He specialises in helping clients overcome the complexities involved in owning their second private property in Singapore.
He had over 10 years of experience in real estate investing and have written over 40 detail guides on decoupling and minimising ABSD. He is a licensed real estate consultant and holds a Bachelor degree in Business Management from the Nanyang Technological University.

Kenji

Co-Author

Kenji is the Group Division Director of ERA Realty Network.
He have got over 20 years of experience in real estate and have successfully helped over 50 couples purchased their second property. He specialises in helping client achieve the best approach towards acquiring their ideal investment properties while minimising ABSD.