A mother looked at the judge’s decision to reject her application to sell her home, thinking thatbuyingan apartmentregistered inher six-year-old son’s name forS$1.8millionandselling it for S$2.28million would be a good deal, but not realizing that the law thought otherwise.
The complex legal realities behind the practice of purchasing a home for a minor child through a trust have been revealed recently when the High Court of Singapore rejected several applications involving the sale of properties on trust in quick succession. One mother was denied because she could not prove that the sale was for the benefit of her son, while another father hit a brick wall when he tried to buy a condominium for his son in trust, in contravention of HDB regulations.
These cases have exposed the misconceptions and potential risks that many people have about trust purchases. The central question in these cases goes to the heart of the nature of a trust purchase:is it an investment or a legal arrangement for the future of a child?
The mother was refused for selling her house:
The law recognizes trusts as non-investment vehicles
Two recent Singapore High Court decisions are a wake-up call for families looking to buy homes for their children through trusts. In the first case, a motherpurchased a condominiumforS$1.8million in 2019 and registered it in trust inthe name ofher6-year-old son.
Six years later, she founda buyerwilling to offerS$2.28million and planned to sell the value-added property, only to have the application rejected by High Court Judge Herman Chu.
The judge made it clear thatthe trust assets were not investment assetsand that the trustee should not deal with them unless authorized by or for the benefit of the beneficiaries. The woman wanted to sell the apartment only because of the appreciation in value of the property, without proving that it was for the benefit of her son, and her application was therefore rejected.
The second case involved a father who had purchased a resale HDB flat for only eight months, and who had purchased an apartment for his nine-year-old son by way of a trust, in clear contravention of the HDB’s minimum residency requirement. The judge held that the man’s act of signing the trust deed was a clear circumvention of HDB’s regulations, and therefore the court would not uphold such an application.
Schematic diagram, source: United Daily News
Tripartite legal arrangements:
Asset protection and succession planning
What exactly is a trust? Simply put, a trust is a legal arrangement that involves three roles: the principal, the trustee and the beneficiary.
The settlor transfers property to the trustee, who holds and manages the assets for the benefit of the beneficiaries as provided in the trust deed.The beneficiaries enjoy the benefit of the trust property, while the trustee is the legal owner of the assets.
In Singapore, there are 3 common types of trusts:
A living trust is a trust created while the settlor is alive and is commonly used to manage family wealth and asset protection;
A testamentary trust, on the other hand, is formed in the settlor’s will and the assets are transferred to the trust after his or her passing;
A standby trust, on the other hand, is a hybrid of the first two, where the trust is dormant after it is established until a specific event occurs.
The vast majority ofcases where a trust is used to buy a homeare living trusts.The biggest advantage of this type of arrangement is asset protection, wherethe assets in the trust are protected from creditors and ensure that they are properly managed according to the wishes of the principal.
All-Cash Purchase Restrictions:
Higher taxes and refund conditions
Purchasing a property through a trust faces a number of practical limitations. The most straightforward is the financial requirement:trust purchases must be paid for in full in cash, with no access to provident funds and no ability to apply for a bank loan.
This means that home buyers need to have sufficient liquidity to cover the full cost of the home. There is alsoan additional buyer’s stamp duty of65%that needs to be paid when transferring residential real estate to a trust.
However, if certain conditions are met, a refund of this tax can be claimed from the Internal Revenue Service. Requirements for the refund include that the beneficiary’s name must be in the trust deed and the beneficial interest must be vested in the beneficiary and cannot be changed.
If the beneficiary is underthe age of21and is a first-time buyer,the entire65%taxis usually refundable. However, the entire process requires the submission of detailed documentation and takes about two months to process.
It is worth noting that in recent years, the Singapore ZF has taken steps to prevent people from using trusts to buy property to avoid tax.FromMay2022, all transactions that transfer residential real estate to a living trust will be subject toa35%ABSD, and byApril2023, this rate has been increased to65%.
Schematic diagram, source: United Daily News
Five-year limit for HDB flats:
Violations may result in home repossession
There are legal and financial risks associated with trust purchases that cannot be ignored. From a legal perspective,trust assets are legally vested in the beneficiary, not the principal.
This means that if the children are minors, the sale of any assets in their names must be approved in advance by the court and it must be proved that the sale is for the benefit of the children and not an investment for profit.
There are additional restrictions for HDB homeowners. According to HDB regulations, buyers of resale HDB flats, their spouses and core family members cannot purchase a private residence,including properties held in trust,within the five-year minimum residency period.
Violation of this provision may result in compulsory repossession of HDB flats by HDB or the imposition of fines.The restriction also applies to children who are classified as basic tenants, and are subject to the restriction on investment in residential properties, whether local or overseas, according to Yi-Ting Teo, head of legal and compliance atProvidendGroup, a financial planning firm.
Comparison of lifetime planning:
The advantages of trust flexibility are clear
Trusts and wills are both tools for succession planning, but operate differently.A will takes effect after the principal passes away, whereas a trust can operate while the principal is still alive.
This difference makes trusts uniquely suited for asset protection and ongoing management. For families with young children or special needs family members, trusts can ensure that assets are properly managed by a trustee on their behalf when they are unable to do so themselves.
A well-designed trust can provide more comprehensive protection than a simple will. Under an irrevocable trust, if an asset is transferred to the trust for at least five years, it will be protectedfrom creditors and divorce claims.
However, it is worth noting that any income received from the assets in the trust can only be used for the beneficiaries, such as children’s education, medical expenses, living expenses and other daily necessities. Every income and expenditure needs to be recorded in detail and the trustee is responsible for keeping proper books of accounts.
Schematic diagram: Source: United Daily News
The right to sell clause is missing:
Resulting in the inability to dispose of the property autonomously
The design of the provisions in the trust deed is of paramount importance and directly determines the flexibility and applicability of the trust. In the above case, a key issue was that the trust deeddid not containa “power of sale“clause.
It is routine for professional attorneys to include in the deed of trust that the trustee has the right to sell the real estate holdings. This clause should be included unless the client specifically requests that it not be included. Lawyers interviewed pointed out that cases may not occur if there is a power of sale clause.
The trust deed should also specify how the funds are to be managed. The judge in the case specifically noted thata joint account is not the same as a trust account.The fact that the rent was deposited in a joint account with the applicant and his son and that some of the withdrawals were labeled as“business expenses“did not meet the requirements of trust administration.
The correct approach is to open a special bank account for the trust, through which all receipts and disbursements relating to the trust’s assets are made, and to keep full records and documentation. Otherwise, as the case shows, the court may not uphold the sale application as a result.
Schematic diagram, source: United Daily News
[Conclusion]
In his judgment, Judge H. Chu clearly wrote:“Trust assets are not investment assets.“This statement clearly delineates the legal boundaries of trust purchases.
In Singapore, buying a home for your children in trust is never a simple money game, but a long-term commitment governed by strict laws. These real-life cases show that if you fail to understand the legal nature of it, you can face fines or even lose your HDB flat if the property is frozen and cannot be disposed of.
*Reference sources:IRASSingapore,URA,HDB, Trust Companies Act, Lianhe Zaobao, reproduced with attribution, infringement and deletion contact.
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