It’s a Matter of Trust, But What Should You Look Out For?

For the affluent in Singapore, buying a property under a Trust is often seen as a means to safeguard their children’s financial future amid rising cost of homeownership. Though well-intentioned at the beginning, a trust structure can prove problematic when trustees find themselves needing to liquidate assets or unlock capital due to changing financial circumstances.

Two recent Straits Times reports brought to light parents who placed homes in trust for their underage children only to face for the need for the High Court’s approval to sell the units.

In the first case, a father who bought two residential properties under a Trust for each of his two sons and had to seek the High Court’s approval to sell them due to financial difficulties. The court ruled that the sale proceeds from the properties must be returned to the sons, as they were the beneficial owners (beneficiaries) of the properties. When sold, the proceeds must be returned to them, leaving him not entitled to the sale proceeds.

Another similar case that emerged involved a woman who had held a condo unit under a Trust for her son and attempted to sell the unit as the property’s value increased. The High Court judge rejected her attempt, ruling that her decision to sell was motivated by financial gain rather than a desire to safeguard her son’s asset. He clarified that the court must be convinced that the Trust was not created to evade the Additional Buyers’ Stamp Duty (ABSD) but was instead in the son’s best interests.

As the name suggests, a Trust is when a trustee holds an asset for the benefit of the beneficiary. Being the beneficial owner, the beneficiary is entitled to all income and proceeds from the sale of the property. If the trust deed does not expressly provide the trustee the authority to sell the property, the trustee must obtain consent from the beneficiary or seek a court order to authorise the sale.

So, while these are common pitfalls of buying under a Trust, are there other factors that are often overlooked? And if so, why do some buyers still choose to use a Trust?

What you need to know when buying property under a Trust

Buyers might overlook some important factors before their purchase. Here are a few considerations:

1. Upfront Cash Payment Required

Typically, buyers must make full cash payments for any property bought under a Trust. CPF funds cannot be used, and banks or financial institutions will not grant loans for properties purchased under Trust. Additionally, ABSD of 65% must also be paid upfront in cash.

For example, taking a $2.5 million property purchase under a Trust. This means that the buyer must fork out $94,600 in BSD and $1,625,000 in ABSD respectively. Hence, a total of $4.2 million in cash will be required for the transaction.

ABSD remission is only granted if specific criteria set by IRAS are met. Factors considered include the Trust’s terms, beneficiary’s eligibility (such as first property, citizenship, etc.), and whether the beneficiary interest is vested (fixed, not contingent) and identifiable at the time of transfer.

2. Higher Legal and Administrative Fees

The legal and administrative costs associated with purchasing a property through a Trust are typically higher than those for a standard property purchase. Buyers generally pay between $2,000 and $5,000 in legal and conveyancing fees for a straightforward purchase. For purchases via a Trust, the Trust Deed document can cost upwards of $3,000, depending on the complexity of the trust.

Additionally, if a professional trustee is appointed, the ongoing management fees usually range from 0.5% to 1.5% annually of the trust’s total asset value.

3. If a property is held in someone’s name as a beneficiary, it may affect their ability to buy a property in the future. 

The beneficiary is regarded as the owner of the property. While there are benefits, such as rental income and potential capital growth, it also entails restrictions on future property acquisitions.

To illustrate, we will use the example of parents buying private property with their child’s name as the beneficiary. HDB recognises the child as the owner, meaning they will not be eligible to purchase future HDB properties, such as HDB’s Build-to-Order (BTO) flats, with their spouse. Even if the Trust property is sold, they must wait 30 months before becoming eligible for a BTO flat. Similarly, for resale flats, the child will need to serve a 15-month waiting period after disposing of the Trust property before being eligible to purchase one.

Furthermore, if the child plans to buy another residential property while still being the beneficiary, they will need to pay ABSD on that property.

4. You cannot assume that a beneficiary is holding the property on your behalf

When you (a settlor) purchase a property through a Trust, the beneficial ownership of the property vests with the beneficiary. This means that although the trustee has the authority to make decisions in the best interest of the beneficiary, the benefits ultimately belong to the beneficiary. This includes any sale proceeds and/or rental income.

As highlighted in both Straits Times articles, trustee holding properties held in a trust must manage it in the best interests of the beneficiaries. This includes considerations regarding the sale, as well as the proceeds and profit derived from it. If the court does not believe that the sale benefits the beneficiaries, it will not approve it. In both cases, it was assumed that the parents had purchased the properties as a gift for their children, held under a trust, possibly because the children were under 21 years old. When sold, the proceeds would be returned to them. Even if the parent (trustee/settlor) had paid for the properties, he would have no access to the proceeds.

5. Income tax payable for rental income of property held under trust

When a property held under trust is rented out, the rental income is taxable. For beneficiaries who are Singapore tax residents, they are taxed based on their personal income tax rate. Furthermore, parents holding the property for their child may not be able to claim the Qualifying Child Relief for their own income tax if the child’s income exceeds $8,000 per year (inclusive of the rental income).

If the beneficiary is not a Singapore tax resident, then the trustee is subjected to a flat tax rate of 17%, Singapore’s corporate tax rate.

Why Do Some Buyers Purchase Property Through a Trust?

Most buyers who utilise a Trust do so for legacy planning, either for succession purposes or if the beneficiary is unable to hold the property themselves.

1. Safeguarding interests for vulnerable beneficiaries

People at risk of manipulation, such as minors and those with disabilities, could benefit from someone they trust managing their assets for them.

In Singapore, a person under 21 years old is regarded as a minor by law and cannot legally hold property in their own name.

2. Protection of assets from creditors

Assets held in trust are generally protected from creditors, as the debtors are not the beneficial owners of the assets. Additionally, assets held in a trust are generally not considered matrimonial assets and are excluded from divorce settlements, as the settlor owns the parties in the trust.

3. Succession planning/Smooth distribution of assets

A Trust:

•  Can be used to facilitate a smooth and straightforward transfer of assets (property) to beneficiaries. Additionally, a Trust can be kept confidential.
• May also offer more flexibility for legacy planning. For example, assets under a Will can only be distributed after the testator passes on, however, in a trust, the settlor can in include in the trust deed, terms such as deciding when beneficiaries receive their inheritance (even when the settlor is still alive) or providing ongoing financial support, etc.
• Allows for a timeframe to transfer assets, such as in stages or upon reaching certain milestones in life.

Does buying a property under a Trust make sense for you? 

A Trust structure appeals to buyers seeking asset protection, confidentiality, or customised planning for beneficiaries with special needs. With the right structure, a Trust can provide flexibility, control, and a peace of mind.

The question is: Does buying a property under a Trust structure make sense for your circumstances? If so, do speak to a legal advisor as the process is more complex and requires careful planning and legal advice tailored to your specific needs.