Buying Properties Under a Trust, What Should You Be Looking Out For
Updated: Oct 21, 2021
You would have probably started hearing about how some parents are buying properties in Singapore in the name of their young child who is still below 21 years old. In cases like this, the parent would buy the property in their child’s name, held in a trust.
So here is how this scenario would work: until the child/beneficiary of the trust reaches a certain age (usually 21), the parent/trustee will legally own the house and hold the property “in trust” for their child. Assuming that the child has no disability, when the child turns 21, he or she will inherit the property. After all, the property was bought under the child’s name to begin with.
You might be wondering why some parents are buying properties in Singapore under their child’s name in a trust? Are there clear pros and cons of doing so in Singapore? Let’s take a look.
Pro #1: Additional Rental Income
Let’s imagine you have bought your child a private property for his or her future use once they reach adulthood and move out. But in the meantime, before they are ready to live on their own, the additional home you bought in your child’s name under a trust can actually generate income for your child. This is assuming, of course, that you rent out the property to tenants while waiting for your child to leave the nest. The rental income, and any other income that comes out of the property will be put into a trust, and can be used for the good of the child. This essentially helps you save for your child’s future.
Pro #2: No Additional Buyer’s Stamp Duty (ABSD)
Additional rental income is one of the main reasons people in Singapore consider investing in a second property, in addition to the one they are already living in. But normally in Singapore, there are drawbacks to having more than one property under one name, like the additional buyer’s stamp duty (ABSD). The ABSD is a tax that people in Singapore are liable to pay when they buy additional residential properties in Singapore, and still hold on to the one they already have. As of 2018, the ABSD stands at 12% of the price of the 2nd property for Singaporeans, 15% of the price for permanent residents, and 20% for foreigners. For Singaporeans, the ABSD increases to 15% of the price if more residential properties are bought after the 2nd property.
So, if you already have one or two residential properties in Singapore under your name, the ABSD will be high if you wanted another property under your name. Your child still isn’t a homeowner, though. And so, your child won’t be liable to pay the ABSD if a property is purchased under their name under a trust. This is actually a common reason parents might buy a property under their young child’s name – before the child turns 21, the parent(s) would effectively have access to a 2nd property in Singapore, without the drawback of a high ABSD.
Con #1: Child has limited future access to public housing
Of course, there are always two sides to the coin. Because you’re buying a home for your child so far ahead of when they might need to use it, things have the potential to get messy. When your child reaches adulthood, for example, he or she won’t be able to apply to buy a Build-to-order (BTO) flat from HDB or even resale HDB flats, because they already legally own a private property. This also would make your child ineligible for some popular funding options from HDB, such as the CPF housing grant and the HDB housing loan, unless if you choose to dispose off the property way before they reach adulthood.
Con #2: Must pay for the property in full cash
Even though you don’t need to pay the ABSD if you buy a property in your child’s name under a trust, it will be virtually impossible to secure a housing loan for your purchase. This is because your child is unlikely to have significant income, CPF funds or creditworthiness at such a young age. Translation: You will need to pay for the property in full, in cash. For many people, this drawback immediately eliminates the possibility of buying a property in Singapore under a trust. But even if you do happen to have the cash on hand, paying for the property fully in cash might have a big opportunity cost in the long term. Click here to learn more about why paying for a property in full might not be the best option for financial planning. As such, we recommend you to consider buying a property in trust only after you have exhausted other avenues or methods of property ownership.
Pro/Con #3: Autonomy of the child
Your child will be legally responsible for the property. You see, when a property is bought in the name of a child, the child’s net worth instantly increases by, on average, about a million when they inherit the house at 21. They will legally be free to do whatever they wish with the entire property, including sell it, live in it, or use it as collateral for a loan. This might be a lot of responsibility for a young adult to handle right off the bat, and so before they inherit the property, you might want to take time to discuss what your child would do with the property when they hit 21. Do they want to sell it? Continue to rent it out? What do they need to know to help them manage their future asset more effectively? All this information can help your child prepare for the responsibility of owning a house at a young age.
But at the end of the day, remember the person who will be making the decisions about the property would be your child. If they wanted, they would be free to go against your recommendations on how to handle their new asset. So whether or not this factor is a pro or a con to you all comes down to this: do you trust your child to handle the responsibility of inheriting a property at 21?
Con #4: Difficult to reverse purchase
Be careful not to buy a property under a trust on impulse, even if you can afford it! Think over the decision carefully, because once the sale goes through, your decision might be more permanent than you think. You see, you won’t be able to sell the property until 5 years have passed from the time of purchase unless the other party is buying over using full cash as well. So, by buying a property under a trust, do note that you will be locking down a fairly large sum of money within one asset.
All in all, there are a bunch of things to consider before you decide whether or not buying a property under a trust for your child is a good move. It is a big decision, so discuss it with your families, and make sure that you have fully utilised other avenues and methods of property ownership before considering this option. We hope the points we have listed will help you make a more informed decision!