Be Very Careful When Using A Trust To Buy A Home For A Minor

May 11, 2022

Parents should exercise care when buying homes in trust for minors. Credit: The Straits Times

In a column in The Level Ground earlier this year, I wondered if there may be measures taken to curtail the buying of homes in the name of minors who are Singapore citizens.

Parents using trusts to buy private homes for their children, who are under the age of 21 and are citizens, can get round the paying of additional buyer’s stamp duty (ABSD) as long as the home is the first to be held in the name of the child.

Purchasing homes in trust for children can make financial sense, as the said homes can be used to generate rental income and potentially enjoy capital appreciation.

Introduction Of ABSD (Trust)

Buying homes in trust for minors just became more difficult. Effective from May 9, 2022, ABSD (Trust) of 35 per cent will be imposed on any transfer of a home into a living trust.

Where the living trust is structured such that there is no identifiable beneficial owner at the time when the home is transferred into the trust, ABSD did not apply previously. With the above change, ABSD will be payable even if there is no identifiable beneficial owner at the time the home is transferred into a trust. This is a positive move as it closes a policy gap.

ABSD (Trust) will now be payable upfront, when a home is transferred into any living trust. As a concession, a trustee may apply to the Inland Revenue Authority of Singapore for a refund of ABSD (Trust), subject to meeting various conditions.  

Conditions include all beneficial owners of the home being identifiable individuals, and beneficial ownership of the home being vested in all of these beneficial owners at the time of property transfer into the trust.  Also, the beneficial ownership cannot be varied or revoked, or be subject to any condition subsequent, under the terms of the trust.

The refund amount will be based on the difference between the ABSD (Trust) rate of 35 per cent and the ABSD rate corresponding to the profile of the beneficial owner with the highest applicable ABSD rate.

In sum, a trust that buys a first home for a minor who is a citizen should be able to get a refund of the 35 per cent of ABSD.  

Buying In Trust For Minors

Parents who use trusts to buy homes for their children, who are minors, typically cannot tap on home loans. Having to cough up 35 per cent ABSD upfront adds to cash flow challenges of going down such a route.  Buying a S$1.5 million home in trust for a minor, who is a citizen, will now involve paying S$525,000 in ABSD, which can be refunded, in addition to buyer’s stamp duty of S$44,600.

Nonetheless, for the cash rich, paying 35 per cent ABSD upfront that can be refunded, need not be overly problematic. On average, a Singapore home typically generates a net yield of close to 2 per cent on purchase price and that may grow over time. Together with the long-term price appreciation of about 2-3 per cent per annum, the total return from buying a home in safe haven Singapore could be in the mid single-digits -- sound financial rationale for rich parents to use trusts to buy homes for their kids.

However, parents using a trust to buy a home for a minor, who is a citizen, and want to fulfil conditions to get a refund of ABSD (Trust), should be absolutely clear that the said home belongs to the child and that the child, upon turning 21, is free to decide what to do with the home.

The funding of the purchase of the home by a parent confers no right to the parent on making decisions on the home after the child turns 21. Also, any economic benefits from the home purchased by a trust where a child is the beneficial owner accrues solely to the child. A parent cannot bank on the rental income or capital gains of a home bought in trust in the name of a child to help fund retirement needs.

Can parents be confident that young adult children in their early 20s are able to deal wisely with owning a chunky asset such as a home?  Will the use of a trust to buy a home for a child, who is a minor, for legacy purpose become a source of future discord?

Invariably, for wealthy families, there are tricky questions around how much to gift children and how much young scions should be made to work to get prized possessions such as a home.  

Alternatives To Buying A Home

In a world of uncertainty, owning physical property in a safe haven like Singapore is attractive. Moreover, property is an asset class that can hedge against rising inflation.

But one can invest in Singapore property not just through buying a home, but also through buying units in real estate investment trusts (Reits). Typically, Reits offer better yield than owning a home and may provide capital gains too. A parent can, for example, build a portfolio of Reits to generate income that can help fund a child’s education and over time transfer stakes in the portfolio to the child.

For rich locals, using a trust to buy a home for a minor, may still work, even with the introduction of ABSD (Trust).  But there may be more efficient alternatives to building wealth through property exposure, such as from investing in Reits.  

The ABSD regime in Singapore aims to promote a stable and sustainable residential property market. With hefty ABSD payable for locals buying multiple homes, and foreigners buying any home, the playing field favours locals who aspire to own their first private home.  

Nonetheless, parental help means that certain young persons can better afford to buy choice homes compared with their peers, who are in the same income bracket. Whether parental help should extend to the use of a trust to buy a home for a child, who is a minor, boils down to personal choice and assessment of the risks of taking such an action.  

However, making the use of trusts to buy homes for minors trickier - with the introduction of ABSD (Trust) - should be welcomed as part of the tools to manage inequality here. The rich may want to do their part in keeping envy from breeding too by going slow with buying homes in trust for minors.

Credit: Business Times

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