Bought too many homes: Cash-strapped dad sold his kids’ $2.4m trust properties

 A man bought two properties totalling $2.4 million that were held in trust for his two young children but found himself in a bind a few years later when he could not keep up with the mortgage payments.

So he had to apply for a High Court order to sell the apartments. The court eventually approved the sale but instructed him to deposit the proceeds in trust accounts that would benefit his kids only.

At its most basic, the case provides compelling lessons on the risks of borrowing too much to buy property. Besides the loan on the family home, which was being serviced with cash and CPF money, the father also had to foot the mortgage payments on the two trust properties.

The first property, which was bought for the eight-year-old daughter’s benefit, was purchased at $1,434,000 and it had an outstanding loan of $645,300. The second property, which was for the 13-year-old son, was bought at $975,000 and it still had an outstanding mortgage of $438,750.

The father, whose occupation and monthly salary were not disclosed in court, wanted to sell the trust properties because he faced uncertain job prospects. Some of his colleagues had been laid off and he feared he might join them on the chopping block.

With his savings “fast dwindling”, he worried that he might not be able to keep paying the loans on his kids’ properties. He also noted that his elderly parents needed his financial support.

In view of these financial demands and uncertainty arising from his employment, he told the court that it would be prudent, and in the interest of the children, to sell the properties.

To support his application for a sale, he proposed to keep the net sale proceeds of the two properties in trust accounts for the daughter and son.

The father added that he planned to either buy a more affordable property for the children or use the proceeds from the sale to send them for tertiary education. Meanwhile, the kids would continue to live with him and his wife until they reach 21.

Selling trust properties

High Court Judge Choo Han Teck noted that to consider whether it was “expedient” in selling trust properties, the proposed sale must be done for the benefit of the trust, in that it would lead to better administration and management of the children’s assets.

If the father couldn’t meet mortgage payments, the two properties might be foreclosed, which would reduce the value of the children’s assets.

The judge granted the order for the sale but told the father to deposit the balance of the proceeds in the kids’ trust accounts.

The father would then need to produce documents showing the balance of the two trust accounts, the sale price of the units and expenses arising from the sale.

This had to be done to prove that the sale proceeds were being used only for the benefit of the children and no other purpose, as they were effectively the owners of the properties and not their parents.

Here are three important points on trust properties that all investors should know.

ABSD in trust cases

When the man bought the properties in trust for his children in December 2020, he did not have to foot the additional buyer’s stamp duty (ABSD) as the kids did not own any real estate.

But the rule changed in May 2022 to mandate trustees buying residential properties to pay upfront ABSD of 35 per cent. This was further increased to 65 per cent in April 2023.

This means that parents who buy trust properties for their children must now pay 65 per cent of ABSD during the purchase. They can apply for a refund if they can show the taxman that the trust was genuinely done to give the properties to the children, without any strings attached.

For instance, some parents might state in the trust deed that their children can only assume ownership of the properties after they graduate from university. While parents can write such terms to incentivise their kids, such conditions in a trust would not entitle them to an ABSD refund.

If the father in this case had bought the properties after the full ABSD had been imposed, he would have had to pay an upfront levy of 65 per cent of the $2.4 million outlaid – a tidy sum of $1.56 million.

In the past, some parents created such property trusts as a way to avoid paying ABSD when buying additional investment properties in the name of their kids.

But the changes effectively pulled the rug out from under non-genuine cases because those who could afford to make early plans for their kids would not mind footing the ABSD as they would be able to get a refund later.

Misuse of trust

There is a compelling reason why the court in this case imposed strict conditions for the management of the sales proceeds from the trust properties – the money belongs to the children, not their parents.

Indeed, the parents could face penalties if the proceeds were used for other purposes, such as meeting their own expenses or paying off their loans.

Misusing trust proceeds can be a sign that the trust is just a sham scheme to buy additional properties without paying the ABSD.

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

No right over trust properties

When you buy property in trust for your kids, it means you are giving it as an outright gift; you cannot assume that the kids are merely holding it for you.

There have been at least two cases in recent years involving parents who had second thoughts about such trust properties after buying them for their children.

Both concerned fathers who were embroiled in divorces. They wanted to stake claims on the properties, arguing that the trusts were created as ploys to avoid the ABSD.

They both failed because the courts ruled that such trusts were properly created and could not be dismantled without the beneficiaries’ consent.

In one case, the father’s name was taken out from the trust, meaning he could no longer make decisions regarding the property. In the other case, the court ordered the immediate transfer of legal ownership to the adult son.

If there is a lesson from such cases, it is that wealth and legacy planning should not be used to avoid paying ABSD because those with ulterior motives often end up losing even more than any tax savings they initially gained.

Source: The Straits Times © SPH Media Limited. Permission required for reproduction.

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