Living in Singapore is expensive, and cost of living is one of the biggest problems. These days, prices of a 2 bedder private property now goes for $2 million when 10 years ago it would have cost less than a million. It wouldn’t surprise many that over the next few year property prices will continue to soar, that is why many Singaporeans believe that getting a private property now is reasonable.
Can you imagine how much your children or grandkids would benefit if they got something from you that they could live with for the rest of their lives?
They would never have to pay back a 25-year home loan like many of us do, which takes about a third of our lives. One way to do this is to put money aside to buy land for our kids.
Why should you buy a house in trust for your kids?
A parent always wants the best for their kid. Knowing that whatever happen to them, the kid could either live in the home or earn passive income through rental yield to survive.
When you buy property on trust, you are the formal owner of it, but you are only supposed to keep it for your child. Your children will get the land when they are at least 21 years old, but you can make plans for this to happen later if you want. There are a few good reasons to buy a house on trust:
- There is no additional buyer’s stamp duty (ABSD)
- Protection from debt collectors and court cases
- Having the power to set rules and regulations
- When your children get an inheritance, you don’t have to go through bankruptcy.
When a Singapore citizen gets a second or later home, they will have to pay the ABSD. As of 2023, the ABSD is 20% of the price or value of the second home, whichever is higher. When you buy your third or more home, the ABSD goes up to 30%. Mad…
To avoid paying ABSB and earn capital appreciation for your love ones in the future, owning a real estate property is usually the better alternative as compared to stocks and other tangible assets.
The benefit of buying a property under your child’s name
But if you buy a property through a trust, you can buy the unit without having to pay the ABSD. This is because the property isn’t for you; instead, it will be given to your child. When compared to buying a second unit, paying ABSD, and then giving it to your children the normal way, this can save you a lot of money.
But I need to make it clear that this only works if the property is only for your child’s use and not for your own. If the government thinks you are just trying to escape ABSD, the trust can be thrown out. Section 33A of the Stamp Duties Act (SDA) makes this clear.
For example, if you try to buy a house under your child’s name and it’s clear that you’re benefiting from the rental income, you may get the attention of IRAS. Be aware that this could be a form of tax fraud, in addition to making the trust void.
Why should you get a Trust for your kids or grandkids?
So, you should only buy on trust if you want to help your children and not if you want to sneak around ABSD. This means, for example, that any rental income from the house needs to go to your child; you can’t touch it.
This is a complicated legal matter, so you’ll need help from a property lawyer, who you’ll need to talk to them about setting up a trust. Here’s what a lawyer can help you with:⬇️
Safety from debt collectors and lawsuits
When a property is bought on trust, creditors can’t get to it. Even if you go bankrupt, the land can’t be taken away; it will always go to your children.
Also, you can’t lose your house because you’re being sued or because you’re in some other kind of legal trouble. For all means and purposes, it’s like it’s not your property (since you’re only keeping it for your children, who are the beneficiaries).
Because of this, parents who work in jobs with more risk, like having their own business, often buy on trust to protect the inheritance of their children.
Being able to set rules and regulations
Some parents want to make their children do things before they can get the land. The trust can include these. For instance, you might want to say that the property will go to your oldest child, but only if your partner can stay there for the rest of his or her life.
You just need to tell the conveyancing lawyer what you want, and they will make the necessary papers.
It’s also important to set rules so that your kids don’t use the property later against your wants (see below).
Your children don’t need an estate when they get an inheritance
The process of taking care of your estate after you die can be expensive. Probate may be needed. This is a formal process that gives your assets to the people who should get them.
Even if you have a will, the person who will carry out your wishes must ask the court for a “Grant of Probate” to start the process. Legal fees for probate can cost as much as a few thousand dollars. It can also take a long time, sometimes months or even years.
But if you buy a property on trust, you can give it to your children without any of these problems. Your trustee would be obilageted to follow the rules set in place in hand over the property to the rightful owners or if they have reached the legal age.
Problems with getting a house on trust
Some of the main problems are:
Hard to get a loan
Almost no lender will give loans for homes bought on trust. There are a few exceptions, like if you are very rich and can use private banks. Almost always, you will have to pay for the whole property at once.
By itself, this means that the trust is not a good place to put your own money; the sky-high cash upfront means that you will get a low cash-on-cash return(cannot take advantage of leveraging). Normal ways to buy a home require as little as a 25% down payment.
Not only can you not get a loan, but you also can’t use your CPF money to pay for homes bought on trust.
Note that buying new start properties, which use the Progressive Payment Scheme (PPS), is one way to lessen the effect of this. This is because you don’t pay anything until different parts of the building are finished. Still, most Singaporeans can’t afford it and it’s hard to see why they should invest in it.
Your kids can do what they want with the land
If your conveyancing lawyer doesn’t put some limits on what your kids can do with your property (see above), you can’t stop them from doing whatever they want with it.
This could be a risky thing to do, especially if you live in the house. For example, you can’t stop your kids from selling the house or taking out big loans against it so they can live in luxury. Because of this, most parents won’t give their children such a valuable thing until they are at least 21 years old.
Costs for lawyers can be high
Most of the time, setting up a trust will cost between $5,000 and $6,000. The fees can be even higher for situations that are hard to understand, like trusts with a lot of rules. You can look around for a cheaper law firm, but a trust is never the least expensive way to buy a house.
Your child won’t be able to buy other homes
Keep in mind that your child won’t be able to buy an HDB flat because a property is already being held in trust for them. Also, when they get the land, they will have to pay taxes like everyone else. This includes the ABSD, so if your child wants to buy a home other than the one they’re getting, they’ll have to pay 12% more as Singapore citizens.
Because of this, you should also give careful thought to how old your child will be when they get the property.
For example, you could say that they will get the land when they are 30 years old. What if they get married at age 25 and want to buy a place of their own? They might get stuck and have to rent for the next couple of years.
Before you move forward, you should talk about these things with your family.
Take Note of Changes
As prices of Singapore property continue to climb higher, restrictions and new laws would soon come into place. Trust is no exception.
The Ministry of Finance (MOF) announced at 11.30pm on Sunday, May 8, that additional buyer’s stamp duty (ABSD) of 35% will apply to any transfer of residential property into a living trust with effect from May 9. This new law is used to avoid buyers from taking advantage of the trust system to avoid the ABSD. Rightfully so!
A trust is a good way to keep your kids safe.
In my opinion, getting a trust is definitely something that more wealthy Singaporeans in high-risk businesses should think about. But trust is not a good way to avoid ABSD and invest in your own business. If your only goal is to avoid ABSD, you might want to think about other ways, like “sell one, buy two” or getting a unit with two keys.