Be very careful when using a trust to buy a home for a minor
Be very careful when using a trust to buy a home for a minor. In a post published earlier this year in The Level Ground, I questioned if there were any plans to limit the purchase of property by minors who are Singapore citizens. Parents who use trusts to purchase private residences for their children under the age of 21 who are citizens might avoid paying additional buyer’s stamp duty (ABSD) if the home is the first to be held in the child’s name. Purchasing a home in trust for children can be financially beneficial because the property can be utilized to generate rental income and potentially appreciate in value.
Introduction of ABSD (Trust)
Purchasing a home in trust for minors has just become more challenging. ABSD (Trust) of 35% will be applied on any transfer of a residence into a living trust beginning May 9, 2022. ABSD did not previously apply where the living trust is constructed so that there is no traceable beneficial owner at the moment the residence is transferred into the trust. ABSD will now be payable even if there is no identifiable beneficial owner at the time the home is put into a trust as a result of the foregoing modification. This is a positive step because it fills a policy void.
When a home is transferred into a living trust, ABSD (Trust) will now be paid ahead. A trustee may request a concession from the court. All beneficial owners of the residence must be identifiable individuals, and beneficial ownership must be vested in all of these beneficial owners at the time the property is transferred to the trust. Under the terms of the trust, beneficial ownership cannot be changed or revoked, nor can it be subject to any subsequent conditions. The reimbursement amount will be determined by the difference between the ABSD (Trust) rate of 35% and the ABSD rate applicable to the beneficial owner’s profile with the highest ABSD rate.
In conclusion, a trust that purchases a first house for a citizen minor should be eligible for a 35 percent ABSD reimbursement.
Buying in trust for minors
Be very careful when using a trust to buy a home for a minor. Home loans are often not available to parents who utilize trusts to purchase homes for their minor children. The fact that you’ll have to pay 35% ABSD up front adds to the cash flow issues. In addition to the buyer’s stamp duty of S$44,600, purchasing a S$1.5 million residence in trust for a citizen minor will now need paying S$525,000 in ABSD, which can be repaid.
However, for those with a lot of money, paying a 35 percent ABSD up front that can be refunded isn’t a big deal. On average, a Singapore property generates a net yield of around 2% on the purchase price, with the potential to increase over time. With a long-term price increase of around 5%,
However, parents who use a trust to acquire a home for a minor who is a citizen and want to meet the requirements for an ABSD (Trust) return should make it clear that the home belongs to the child and that the child, once he or she turns 21, is free to decide what to do with it.
A parent’s contribution to the property’s acquisition confers no right on the parent to make decisions about the home when the child turns 21. Furthermore, any financial benefits derived from a residence owned by a trust in which a child is the beneficial owner go only to the child. A parent cannot rely on rental income or capital gains from a trust-owned home.
Can parents be confidence that their young adult children in their early twenties will be able to manage a large asset like a home wisely? Will the use of a trust to purchase a home for a minor child for legacy purposes lead to future strife?
For wealthy families, there are always difficult considerations about how much to gift children and how much they should be forced to labor for treasured items like a home.
Alternatives to buying a home
Owning physical property in a secure haven like Singapore is appealing in a world of uncertainty. Property is another an asset class that can help protect against rising inflation.
However, you can invest in Singapore real estate not just by purchasing a home, but also by purchasing units in real estate investment trusts (Reits). Reits typically provide a higher yield than owning a home and may also bring capital gains. For example, a parent can create a Reit portfolio to earn income to help support a child’s education and gradually pass interests in the portfolio to the minor.
Even with the establishment of ABSD, wealthy locals may be able to use a trust to purchase a home for a child (Trust). However, there may be more effective ways to create wealth through property exposure, such as through Reit investment.
Singapore’s ABSD system strives to promote a stable and long-term residential property market. The playing field favors residents who wish to purchase their own private property, with substantial ABSD levied for locals buying numerous properties and foreigners buying any home.
Nonetheless, parental assistance implies that some young people may afford to buy better homes than their peers in the same salary group. Whether or whether parental assistance should extend to the use of a trust to purchase a home for a minor child is a matter of personal decision and risk assessment.
However, with the establishment of ABSD (Trust), making the use of trusts to acquire properties for minors more difficult should be welcomed as part of the measures to address inequality here. The wealthy may want to contribute to the prevention of jealousy by taking their time when purchasing property in trust for minors. Be very careful when using a trust to buy a home for a minor.
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Be very careful when using a trust to buy a home for a minor.
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