Considerations For Setting Up A Trust

Many savvy and doting parents are buying properties in trust for their children and this is no longer only for the ultra high net worth parents. The intention of buying a property in trust is not to escape paying the Additional Buyer’s Stamp Duties (ABSD) but for the purposes of providing for their children and legacy planning.

These children are usually below the age of 21 years and therefore do not have the legal capacity to own a property or enter into a contract to purchase a property. These parents would purchase the property in trust for their children and they would be the trustee or legal owner of the property while the child would be the beneficiary or beneficial owner of the property. The parents may stipulate in the trust document whether the property is to be transferred to the child when he/she turns 21 years of age or older.

ABSD is based on the nationality and the property count of the beneficiary and thus, if the child is a Singaporean and does not own any residential property in Singapore, there is no ABSD payable on the property even if the trustee owns multiple residential properties.

Section 33A of the Stamp Duties Act (SDA) states clearly that in a situation where a trust is set up, whether directly or indirectly, to relieve any person from any liability to pay duty or to avoid any liability to pay duty, the Commissioner of Stamp Duties may disregard the transaction and recover the duties together with any penalties from the purchaser.

There are other risks besides being in breach of the SDA if the true intention is not to purchase the property for the benefit of the child but solely to avoid ABSD with the intention to reap the profits and income from the property for the purchaser’s benefit.

The parents may stipulate in the trust document that the property is to be transferred to the child when he/she turns 21 years of age or at any other age. The parents would need to pay or put up the purchase price of the property in cash as no CPF monies may be withdrawn and banks and financial institutions would not extend any loans for the purpose of purchasing a property in trust for another.

The biggest concern of buying a property in trust is that the child may act against the intentions and wishes of the parents. The child may sell the property after the property is transferred to him/her and keep the proceeds for oneself or the child could mortgage the property for a loan or other banking facility for his/her own benefit. The worst nightmare would be the child turning against the parent for the property.

In this scenario, it would not be possible for the parents who provided the cash for the purchase of the property to compel the child to return the property or the proceeds from the property to the parents against the child’s will.

Once the property is bought in trust for the child, the child would be considered as having one property and thus, would not be eligible to purchase a HDB flat and required to pay ABSD if he/she purchases another residential property in the future. This may frustrate an adult child if they wish to invest in a residential property of their own or apply for a HDB Build To Order (BTO) flat with their spouse or spouse to be.

A trustee has fiduciary duties and a duty to administer the trust for the sole interest of the beneficiary. If the parent as trustee fails to exercise due diligence as trustee of the property, he or she is liable personally to the beneficiary. The duties of the trustee will be further discussed below.

Thus, if the intention is to escape ABSD, the parent may be better off paying the hefty ABSD and at least, save himself/herself from the worst nightmares and still able to retain control and ownership of the property as well as maintain a good relationship with his/her child. The strong advice is to purchase a property in trust for a child only and only if the true intention is not to escape ABSD but to gift the property to the child for the child’s sole benefit and to provide for the child’s needs.

Of course, many parents these days, have genuine intentions to provide for the future needs of their children for different reasons. Many see buying a property in trust for their children to be a useful legacy planning tool.

In these recent couple of years, there have been many en bloc beneficiaries who are using their en bloc windfall to finance the purchase of properties in trust for their children. These parents typically, look at smaller one bedroom flat or flats costing $2 million and below to provide their children a leg up in life with a property which may be beyond the reach of their children in time to come when they enter the workforce and save enough to pay for the deposit of a property.

Some parents wish to secure a property at today’s prices as they expect prices of properties to appreciate in value and prices of properties to be beyond the reach of their children when they reach adulthood.

Others may plan ahead as they have children with special needs or adult children who are unable to manage their finances. A trust would be ideal to safeguard hard earned assets that may fall into the hands of beneficiaries who are too young to manage their finances or vulnerable due to special needs or have very extravagant lifestyles and spending habits.

Parents who own high risk businesses or professionals with exposure would also consider purchasing a property in trust for their children to safeguard some of their assets from potential creditors and to ensure that the needs of their children are taken care of even if they are sued and adjudged a bankrupt. The property will be beyond the reach of creditors after 5 years have lapsed from the date of the trust.

Further, the cost of raising a child from birth until he/she completes their tertiary education is astronomical and may be as much as $650,000 or more. This is before taking inflation into consideration. In this regard, some parents are purchasing properties to take care of their children’s future needs. The rental income of the property purchased in trust for the child may be utilised for the child’s education and maintenance and when a larger sum such as tuition and living expenses for an overseas tertiary education is required, the property may be sold to pay for the said purpose.

Some wives would actually prefer that their husbands purchase a property in trust for their children. Lawyers have been consulted by insecure and suspicious wives who are worried that in the event that the marriage breaks down and ends in a divorce, the wife may get an alimony and a portion of the assets even if she does not work and only looked after the family during the marriage. However, the children may not get any substantial assets but a meagre monthly maintenance. The situation may worsen if the husband has a second family in the event of a divorce and the children from the first marriage may actually be in a worse off position. In this scenario, the wife may prefer that her husband buys a property in trust for their children. The setting up of this irrevocable trust would ensure that the property bought in trust would not be subject to division in a divorce.

If the property is held in a trust for the child and even when the child is grown up and becomes an adult, there is a level of protection for the adult child especially if the trust document contains strict terms that the property is meant for the child’s sole benefit and not be part of the child’s matrimonial assets.

In order to set up a trust, the Inland Revenue Authority of Singapore (IRAS) would require the following information:-

  1. Reasons for acquiring the property in the name of the trustee;
  2. Usage of the property;
  3. Relationship between the trustee and beneficiary.

A valuation report is advisable as stamp duties are based on the valuation or the purchase price, whichever is higher so as to avoid inadequate duties on the document.

As the property is fully paid with cash, the provider of the funds would be required to furnish evidence of the source of funds to purchase the property and the source of wealth due to the regulations relating to money laundering and funding of terrorist activities.

Trustees have duties and obligations towards the beneficiaries. They are liable if there is dishonesty or bad faith in their discharge of their duties as the trustee. It is strongly advised that the trustee keeps good records and proper ledger of the trust monies as well as the expenses and receipts. A trust account should be opened with a bank to receive the monies from the trust property and to make payment of permitted expenses. The trustee must be mindful that the trust property (capital and profits derived), income, rental and sale proceeds belong wholly to the beneficiary. The trustees would be responsible for managing the property including the tax return on any income derived.

The trust will be terminated once the beneficiary is of legal age, under no legal disability and absolutely entitled to the property under the terms of the trust document whereupon the property will be transferred to the child. In some circumstances, the parent may intend to allow the child to have the property only later in life or under certain circumstances and these intentions may be documented in the trust document. The parent may consider the terms to be incorporated in the Declaration of Trust, taking into consideration the child’s needs and how he/she wish the property to be managed.

If the intention is to provide and benefit the child, purchasing a property in trust for the child is an excellent legacy planning tool. The parent would be advised to seek the assistance of a professional to incorporate terms which are suitable or appropriate for his/her purposes in the trust document.

Article contribution by Lilian Lim, Managing Partner of Circular Law Chambers LLP