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Using a trust to purchase property

couple with two properties and no home

How did I help a couple own a home by setting up a trust

couple with two properties and no home

How could someone with two properties have no home? The simple answer is because they couldn’t live in them. To help them purchase their home, which is their third property, cost-effectively, we had to do so under a trust.

This was the scenario that greeted me when Alvin and Alice* first approached me.

*Names are changed to protect the privacy of my clients

A recent message from Alvin asking about the rental market reminded me of their case and inspired this post. 

screenshot of chat

Background

They came to me with their problem in 2018. They each own one private property under their own name. But they couldn’t live in either of these properties. 

In fact, they own these properties even before they got married. Coincidentally, their respective parents brought the properties for them when they were still a fairly young adult. 

Property A was brought with cash and paid in full. That property was meant to be a source of passive income for the parents. For some reasons I won’t disclose, the parents can’t own the property in their names. 

Nor did they brought the property under a trust. Although owned by their son, the rent collected was meant to be pass-through to the retired parents.

Property B was more of a gift and a leg up for the daughter. So the parents paid the deposit, and she was to take up a mortgage for the balance. It was rented out to help pay the mortgage to the bank.

Financing strategy

Allow me to side-track a little to discuss a little about this interesting strategy adopted viz-a-viz Property B.

If the parents had a $250,000 gift for the child, rather than gifting it now in cash. And risk losing it through volatile investments, or worse still, being squandered.

This sum could form the down payment for a $1 million dollar property with the balance $750,000 coming from a bank loan. 

As she was young and had time on her side, she can leverage the longest loan tenure and let the tenant service the monthly payment. At the end of the tenure, the fully paid asset would likely be worth around $1,728,000*.

*Based on a 1.84% p.a. inflation on housing and utilities from a time period of 30 years from 1989 to 2019. Source: Monetary Authority of Singapore (MAS) inflation calculator

That initial $250,000 could have grown by an annual compounded rate of 6.66% to a sum of $1,728,000. And on top of that, by 30 years time, this asset would be generating monthly cash flow providing passive income.

Of course, the above figures were obtained with some major assumptions. Firstly, it assumed that the inflation rate for the last 30 years will be the same in the next 30 years. 

Secondly, it also assumes the rent is uninterrupted and is greater than the various costs plus the principal repayment.

Costs here include interest charges, maintenances, any repairs or upgrades, fees and miscellaneous. 

A final assumption that the property doesn’t get en bloc during the course of being paid up. 

The above scenario was outlined in one of my Financing Strategy Videos. Visit my YouTube Channel for more such strategies!

The Problem

They have been married for close to 6 years but is being held back from setting up their own home. 

This is because they faced hefty Additional Buyer’s Stamp Duties to own a second property. Moreover, their ability to get a mortgage loan is severely restricted due to the various property cooling measures.

One apparent solution is to sell off Property B and free one of their name to purchase their dream home. However, this property happened to be undergoing en bloc negotiations. 

When I enquired as to the progress of the negotiations and whether they can wait for the conclusion of the en bloc before buying their new home, they said no. 

They can’t wait any longer. Moreover, the en bloc negotiations seem to be facing lots of obstacles and may take years. They’d rather move on, they have some savings which they think it will be sufficient for a new home.

With that, we had a sit-down and went through the sums. 

buy property under trust

Without going into too many details. The savings they have coupled with the hit from the cooling measures meant that they could only get a new condo in the suburbs. Which is far from their ideal of a freehold, city fringe and large-sized unit

The issue here is that this new purchase will attract a 12% ABSD. That saps a large chunk of their savings which they need for renovation. As their requirements would surely lead them to old, resale units that need a major overhaul.

In addition, we could only purchase the new home under one name as the other spouse still have an outstanding mortgage loan for Property B. Under MAS ruling, the available loan-to-value for such a case would only be 45%. 

Moreover, CPF usage is also reduced as they need to set aside half of the prevailing minimum sum. Having only one borrower limits the loan as it will be based on one income. 

via GIPHY

It is starting to feel like we are stuck between a rock and a hard place.

After further discussion and a reveal of the fact that Property A is actually fully paid, we started considering the option of setting up a trust. And purchase the new home under their children’s name. As they are only 2 and 4 years old, setting up a trust is the only way.

But any purchase under trust has to be in cash and paid in full. That is a huge sum for the type of properties we have shortlisted and were viewing by then. 

The Solution

Then, it dawned on me! 

Why not do a mortgage withdrawal loan on their existing properties. This akin to taking a loan on the new purchase. That solved the issue of having sufficient funds for the purchase and the renovation.

As the new purchase will be under trust, it has to be fully paid and wholly-owned by their children. After highlighting the consequences, restrictions, rules and potential pitfalls of using trust. They are all clear and good to go.

The next step was to pay a visit to the lawyer to set it up. 

buy property under trust

And within weeks, I’m happy to report – they got their new home!

They need not dispose of their existing properties and they saved a huge sum towards their home purchase. 

If they had to pay additional taxes on their purchase and couldn’t finance the bulk of it, they could not have had a home near their parents. 

Most importantly, having the ability to free up cash and take a loan gave them the confidence and ability to own their own home.  

If you have a dream or a situation you’d need help with, feel free to reach out for a discussion.

buy property under trust

To get started, pick a date and time that is available below, free for all my blog readers.

 

Updated on 4 November 2020

Best to appoint two trustees. Under the Trustee Act, there is a need to have a minimum of 2 trustees to give a valid receipt to the next purchaser. Or can wait for the Beneficiary to turn 21 to issue a valid receipt to the purchaser with respect to the sales proceeds. 

Trust is formed by way of a Trust Deed or a Declaration of Trust. Once formed, it cannot be cancelled. 

It is a formal document that outlines the duties and powers of the Trustees. Hold a legal interest in the property. Therefore, people that want to buy a HDB or EC, then best not be a trustee. Likewise, a HDB or EC owner still serving MOP, this person cannot serve as a trustee.

SPR HDB owner also cannot serve as a trustee as they cannot acquire an interest in private residential property without disposing of their HDB flat.  

The trust document must be stamped contemporaneously with the sale and purchase agreement, function as a formal inform to IRAS that this purchase is under a trust. 

Can’t use CPF or take bank loan. A trust purchase is technically a purchase as a gift to the beneficiary. (Purchase under gift)

Under the latest Insolvency, Restructuring and Dissolution Act, there is a minimum holding period of 3 years. Meaning the trustees cannot sell this property within 3 years of its purchase. 

 

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