Purchasing a property in Singapore is often more than just acquiring a home – many invest in long-term financial planning. In this case, parents may be interested in how they can purchase private properties for their children who still need to have the legal capacity to own property due to being below 21 years old.
This article explains how a trust allows the child to own the property beneficially and explores what a trust is, its legal and practical implications and the motives behind it. Let’s get started.
About Buying Properties in Trust
Called a three-party relationship, a trust is an agreement in which one party transfers their property to a second party (the trustee), who holds it for the benefit of the third party (the beneficiary). This binding legal arrangement obligates each party to fulfil their responsibilities as detailed within its terms. The three individuals involved in buying property under trust are:
- Settlor is the party providing assets to the trust
- The trustee (or legal owner) is responsible for managing those assets. This can be the same person as the settlor.
- The beneficiary or trustor is entitled to receive perks from the assets held in the trust.
What Are the Steps and Requirements?
The settlor and trustee must agree and execute a Deed of Settlement to set up a trust. This deed will outline key terms such as initial beneficiaries, the appointed trustee, and any powers the settlor wishes to retain. Once all these details have been agreed upon, assets can be transferred into the trust.
If there is no change in the beneficial interest of the private property (e.g., the legal title remains with the settlor), a trust deed must be stamped at a fixed duty of $10. It is important to note that properties purchased under trust must be paid for in cash, as banks are unlikely to offer loans for such purchases, and CPF monies cannot be used.
Additionally, there is an additional buyer’s stamp duty payable for buying property under trust. However, it is still possible to apply for the remission of ABSD paid provided the conditions are met. The application needs to be made within 6 months after the date of execution of the instrument.
It is advisable to lodge a caveat on the child’s behalf for further protection while buying property under a trust.
Legal Rights of a Beneficiary
The legal rights of a trust beneficiary are determined by the type of trust set up. A Revocable Trust allows the settlor, or creator of the trust, to change or revoke any items in the documents, meaning that beneficiaries have few rights.
- After the settlor’s death, a revocable trust may become irrevocable, meaning that the trust’s contents can’t be changed at will.
- In an irrevocable trust, the settlor is no longer living, so no one has absolute rights to the trust document. Change of irrevocable trust can be done through a court order.
- As a general rule, trust beneficiaries have the right to information. Beneficiaries can ask the trustee why they are taking certain actions and demand an accounting of all trust activities.
- Trust beneficiaries are usually divided into two categories: current and contingent, with current beneficiaries enjoying immediate income generated by the trust and contingent beneficiaries benefiting later.
- State laws also determine what rights a beneficiary will have, including the right to payment, information, accounting, and removal of the trustee. In some cases, beneficiaries may also be able to terminate the trust.
Applying to the IRAS (Inland Revenue Authority of Singapore) for a refund of the ABSD (Trust) can be done by a trustee, provided that certain conditions are met. These include identifying all beneficial owners, with ownership vested in each beneficiary without possibly being revoked or changed later. Do consider it when you buy property under trust in Singapore.
Key Implications of Irrevocable Trust
Several potential issues arise when buying a property through an irrevocable trust, as the assets placed in it will no longer be under our ownership.
- Cash Layout: Securing a loan for a child below 21 years old is not possible unless the child has already started working before that and the bank will need to consider his credit status.
- Parental Wishes: The child may choose to go against their parent’s wishes and sell or mortgage the property for a loan.
- Property Counting: The trust-controlled property will count towards the number of properties owned by the child, thus limiting their ability to purchase an HDB flat.
- Credit Rating: The child’s credit rating may be affected if mortgage repayments are unmet.
- Income Tax: Rental income from the property must be declared and taxable.
- ABSD Claw Back: The authority may claw back the ABSD and impose penalties if the trust is set up to avoid it.
FAQs
1. When Does a Trust End?
The trust will conclude when the young person reaches legal age, i.e., 21. That individual is then given full beneficial ownership of the residential property and its associated liabilities. The trust may also be terminated once all conditions within the trust document have been fulfilled. Upon dissolution of the trust, the new beneficial owner must comply with the state’s laws about income tax or mortgages that come with the private residential property.
2. What Is Trust Deed?
Trust deed involves the legal relationship between a trustor and a beneficiary. A professional lawyer usually drafts this document when a property is being purchased. The trust deed should include essential information such as the details of both parties, the address and type of assets (in case it involves real estate), the number and name of shares in the company if it’s related to shares, etc. Moreover, they should also state the trustee’s powers, which should include the right to rent, buy and sell trust property and deal with all legal matters.
3. What Are My Duties as A Trustee?
The duties of a trustee, as set by the law of equity, include not taking advantage of their position and profiting from it. If the trust deed permits, fees can be charged but must be clearly outlined. Create a separate bank account for all income and expenses related to trust assets, like rental payments, property tax, and other relevant taxes.
It will help avoid any disagreements that may arise in the future. Furthermore, a trust deed with an exemption clause can protect the trustee from accidental negligence but not deliberate theft of trust assets.
In conclusion, buying property under trust does have its advantages and disadvantage. Especially when the ABSD for trust has increased significantly from 35% to 65% on 27 April 2023, careful consideration is needed even though ABSD remission is possible with its eligibility conditions met. Speak with a lawyer to have a thorough understanding of using this method of buying property. Otherwise, you can also seek the advice of a professional real estate agent on what works best for your current situation.
