Pitfalls of buying real estate for kids

Cash-strapped dad sold his kids’ $2.4m trust properties

He told court he could not service mortgage payments and also feared losing his job

Tan Ooi Boon
Invest Editor

A man bought two properties in trust for his children when they were still below the age of 21, but he later sold the homes to keep up with mortgage payments and avoid losing his job. He also told the court that he could not service the mortgage payments and feared losing his job.

Late last year, he was asked to stand down when the bank started retrenchments, but his position was saved when he was made the relationship manager for priority banking customers.

“The bank told me that if I could not keep up with my mortgage payments, I would be asked to resign,” said the man, who was in his early 50s.

The properties were bought in trust for his children, a son and a daughter, for about $2.4 million when they were below the age of 21. The properties were then sold off for a lower total price when the market softened, but the proceeds could not be used to pay off the trust loans immediately because they were still in the names of the children.

He applied to the High Court for the right to sell the trust properties so that the loan could be discharged and the mortgage debt paid off. The court ruled that the arrangement was made for his children’s benefit, and approved the sale.

SELLING TRUST PROPERTIES

High Court judge Chow Han Teck said that someone who buys property on trust for his children must be clear about the consequences and the commitment involved.

He said: “The parent cannot ignore the trust arrangement just because the property is in a trust account for the children.”

The judge noted that in this case, since the properties were bought in trust for the children, the proceeds of the sale should be kept for their benefit until they reach 21.

The judge also said that anyone using an arrangement solely designed to avoid paying the Additional Buyer’s Stamp Duty (ABSD) should not be allowed to do so and may be subject to severe penalties.

He said: “Such a person should pay the stamp duty that had been avoided plus an additional 50 per cent surcharge.”

Anyone using an arrangement solely designed to avoid paying ABSD can face severe penalties, such as paying the stamp duty that had been avoided plus an additional 50 per cent surcharge.

TRUST vs OWNERSHIP

The judge accepted the man’s explanation about the sale and noted that the arrangement did not result in the children becoming the beneficial owners of the properties immediately.

He said that the properties were held in trust for the children, but the legal ownership remained with the father until the children reached 21.

The judge also noted that the children had no right to the trust property until they reached the age of 21. The proceeds from the sale were to be held for their benefit until they reached that age.

NO RIGHT OVER TRUST

There is a compelling reason why the properties held in trust cannot be sold, transferred or mortgaged. This is because the legal title remains with the trustee until the beneficiary reaches the age of 21.

The court’s decision clarifies that parents who buy trust properties for their children must remain responsible for servicing the loans and cannot ignore the arrangement simply because their names are not on the title.

The case involves issues that financial advisers should raise with clients who are buying property on trust for their children – particularly the risks and responsibilities involved.

The pitfalls of buying real estate for your kids

Thinking of buying an apartment for your children so that they can have a head start in life without the financial burden of a mortgage?

Before well-off parents jump into the popular bandwagon of this kind of financial planning to benefit their next generation as well, they should realise that such moves are not without pitfalls.

One of the biggest risks is that such “gifted” real estate will be shared by the kids with the spouses of their marriages instead of the intended beneficiaries.

Take one real-life example: A father bought property in trust for his son and kept proper title documents. The son married, and the couple lived in the house.

Protection is lost once the property is already transferred, as all property cannot easily avoid becoming a marital asset, exposed to division if divorce should happen and either spouse must vacate the house with a future spouse.

So it is very likely that your capital will use existing properties that were gifted to their spouses in their matrimonial home.

Here are three important points parents must know before buying property to benefit their children.

INHERITANCE BECOMES MATRIMONIAL PROPERTY

A recent divorce provides the “wake up call” to parents who have heavily invested and given new family assets to their children while not considering possible outcomes.

The judge in this instance ruled that the gifted property – the family home – was a matrimonial asset because both the husband and wife lived in it and raised their children there.

As a result, one spouse had to move out and the house was later sold to divide the assets so the whole family could live here comfortably.

They built a common kitchen and dining area; on the second floor, there are two bedrooms, one for each of the son and daughter.

There is a “pitfall” if the house is used as the marital residence, because it can be exposed to asset division.

Although the son was told his parents gifted the house, it became vulnerable once it was used as the marital home and inheritance failed the purpose.

RISK OF OVER-LEVERAGING

Parents should always exercise caution when buying property for their children, especially if it involves the use of leverage such as mortgage loans. Over-leveraging can expose the family to financial risks, especially if the parent cannot service the loans.

The best reason for buying property in trust for your kids is to save money on stamp duty. But the Court of Appeal said that buying property in trust should not be used as a means of avoiding ABSD.

So parents should exercise caution and be aware of the risks if the purpose of letting your kid hold property was to save money on paying ABSD, which can bring penalties for stamp duty avoidance and a hefty surcharge.

CASH IS KING

In such situations, it is advisable for parents to prioritise keeping a strong cash position and avoid putting all their assets into properties held in trust for children. The case cited at the beginning of the article shows the potentially dire consequences of over-leveraging and being unable to service mortgage loans.

The best advice for parents is to keep their options open and discuss their wealth planning goals with financial advisers before making important decisions about buying trust properties for their children.

Retire With More Money

Planning for a good retirement is only a step. Just know how to grow, protect and make the most of what you have. In the book, author and Straits Times Invest Editor Tan Ooi Boon shares practical tips on:

• Maximising CPF for your retirement needs

• Protecting family assets

• Avoiding pitfalls that can ruin your retirement