Whether you own a cozy condominium, a humble 3-room HDB flat or a palatial detached bungalow, you would need to ensure that your property is distributed in a way that suits both you and your family’s best interests upon your passing.
Before parents choose to leave property to their children in a will, there are certain factors that they would need to consider to ensure that their children have the opportunity to enjoy their inheritance.
This article will discuss the following methods of leaving property to your children in a will:
- Directly leaving the property to your children
- Leaving the property on trust
- Creation of a life estate
What is a will?
A will is a legal document by which a person can decide how his assets should be distributed upon his/her passing.
Using a will is a simple and effective way for a parent to transfer real estate to the children when the parent dies. The will would include a brief description of the property and state who should get it when the parent dies.
What are the ways of distributing property in a will?
The parent may choose to:
- Distribute property equally among the children (e.g. 50% to each of 2 children)
- Distribute property unequally among the children (e.g. 40% to one child and 60% to another)
- State that the whole of certain properties (if the parent owns more than one property) go to certain children
- Specify that the property be sold and the profits from those sales be distributed equally or unequally among the children
For points (1) and (2), the property will not be divided physically among the children. Rather, the children would hold distinct shares in a single property and become co-owners of the property they inherit.
What should I consider prior to leaving property in a will?
Discuss with your children how you wish to distribute the property after your passing
When drawing up your will, it is important to consider how the property should be distributed among the children.
For example, if a parent leaves a piece of real estate to multiple children with each child holding an equal share, what would happen if one child wanted to sell the property and the others did not?
This would be an issue as the children would be co-owners of the property, and any decision taken by the children after they inherit the property would need to be a joint decision. But if one of the co-owners wishes to sell the property and the others don’t, then problems could arise.
One practical way in which to avoid such a situation would be to discuss matters with adult children (aged 21 and above) and consent to a family arrangement.
If the children are under 21, the parent may need to consider other options. For example, the parent may wish to leave the property to such children on trust (see below).
Executing a “family arrangement”
What is a “family arrangement” and why is it needed?
In order to avoid any disputes from arising between family members as to property distribution, members of the family could enter into an agreement known as a “family arrangement”.
Such an arrangement would help to resolve the disputed matters and preserve peace of the family by avoiding litigation.
How to execute a “family arrangement” agreement
When a family arrangement deals with the disposition of land, it is required to be evidenced in writing, and formally executed as a “Deed of Family Arrangement”.
The Deed of Family Arrangement can be used to vary the terms of a will, subject to the consent of all beneficiaries named in the will, by re-distributing the assets of the deceased according to the family arrangement.
It is advised that family members give proper care and attention to the negotiation process so as to prevent the Deed of Family Arrangement from being challenged in court subsequently.
There are also other issues to take into consideration when distributing property through a will:
What if the parent is a co-owner of the property he wishes to gift?
In Singapore, a co-owner can hold the property either as a joint tenant or as a tenant-in-common. The manner of holding will affect what happens to the property after one co-owner passes away.
If the property is under a joint tenancy
If a co-owner holds the property as a joint tenant, then when he passes on, the surviving joint tenant will inherit his share of the property.
This is because, under a joint tenancy, each co-owner owns the whole interest of the property. This means that the shares of the property are not divided.
As a result, any such property cannot be validly distributed in a will as a gift. The surviving joint tenant will be entitled to inherit the property instead.
If the property is under a tenancy-in-common
If the property is held under a tenancy-in-common scheme, and the deceased owner has made a will, then his share or interest in the flat will be distributed according to his/her will.
This is because as tenants-in-common, each co-owner owns his own specified share in the property. Thus, it is possible for one co-owner to transfer his specified share in the property to a person of his choice.
Consider eligibility to retain property that is an HDB flat
The rules relating to co-ownership of a private property or a HDB flat are quite similar.
However, if the property in question is an HDB flat, the parent/owner of the HDB flat would also need to consider whether the child would be eligible to retain the HDB flat upon inheriting it.
This is because there are eligibility criteria that proposed HDB flat owners are required to meet before being able to inherit an HDB flat.
The eligibility criteria includes:
- If the child already owns a HDB flat or is listed as an essential occupier of an HDB flat or a DBSS flat, then he is not eligible to retain the flat. (An essential occupier is a person who forms a family nucleus with the HDB flat applicant to qualify for the flat.)
- If the child already owns a private property, he must live in the HDB flat upon the transfer of flat ownership. If their parent bought the property on or after 30 August 2010, the child will also have to decide whether to keep the private property or the HDB flat. He cannot keep both.
Will the transfer of property attract stamp duty?
The transfer of property via a will does not attract stamp duty.
Stamp duty is a tax paid on documents relating to the acquisition or purchase of a property, such as the Sales and Purchase Agreement.
However, when the parent has specified distribution of the property in certain proportions and the children inheriting that property later agree to vary their proportions of distribution among themselves, Buyer’s Stamp Duty (BSD) and any Additional Buyer’s Stamp Duty (ABSD) may be applicable on that excess entitlement acquired by the child who acquires the others’ shares in the property.
For example, if Chan, a widower, died with a will and gave his property to his 4 sons, A,B, C and D equally, the 4 sons would each inherit 25% of the shares in the property. In this case, no stamp duty would be payable on the transfer because distribution of the property via a will does not attract stamp duty.
However, if the 4 sons later choose to vary the arrangement such that A purchases each of B, C and D’s 25% shares in the property, the whole property would be eventually transferred to only 1 of the sons, A. In such a situation, this transfer would be liable for BSD as well as ABSD.
BSD and ABSD would be based on the consideration or market value of the property, whichever is higher, for the 75% share of the property. This is because under the will, A was only entitled to 25 % share of the property.
What if the property is located overseas?
Sometimes the properties that a parent chooses to leave to his children in a will could be located overseas.
Generally, a will created in Singapore can include overseas properties as well. This is unless there is a specific clause in the will that the will should only cover properties in Singapore.
However for the will to be effective in distributing such overseas property, it will also have to be recognised by the courts of the country that the property is located in.
What happens to property not specifically distributed under the will?
Any property owned by the deceased that has not been specifically devised to someone under a will is referred to as residuary property.
Usually, a residuary clause (a clause that deals with the deceased’s residuary property) or a provision in the will that disposes of property, would apply to all real estate not bequeathed to any specific beneficiaries.
If there is no residuary clause then the rules in the Intestate Succession Act will apply to the distribution of the residual property.
What happens if the child is under 21?
The parent can choose to bequeath property to a child under the age of 21. However, if the parent dies before the child turns 21, the child’s inheritance would be managed by a custodian (i.e. the surviving parent or guardian) until the child turns 21.
2. Leaving the Property on Trust
A minor or child under 21 does not have the legal capacity to hold property until he turns 21. In these circumstances, the parent could choose to set up a testamentary trust for the child or children under 21 until such time when the children attain 21 (or other specified age).
What is a trust?
A trust is a relationship created by one person (the parent/settlor) directing another person (the trustee) to hold the settlor’s interest in a property for the benefit of another (the beneficiary/child).
In this arrangement, the parent or owner of the property, is the settlor who holds the legal interest in the property (by holding the legal title) as well as the equitable interest in the property (beneficial ownership).
However, the parent/settlor transfers his legal interest in the property to a trustee (for the benefit of his child under 21), and his equitable interest in the property to the child.
The equitable title gives the child the right to the use and enjoyment of the property and also allows the child to obtain full ownership and property interest upon the passing of the parent in the future.
Under the testamentary trust arrangement, the trustee appointed by the parent will own and manage the property on behalf of the minor until the child turns 21 or other age specified by the parent in the trust.
Creation of a trust over HDB property
Generally, both HDB and private properties can be trust properties. However, before creating a trust over an HDB flat, the parent would first need written approval from the HDB.
3. Creation of a Life Estate
What is a life estate?
Also known as a “life interest”, a life estate is the ownership of property for the duration of a person’s life. This means that the rights of the owner of a life estate, known as a life tenant, will end when he dies.
In the meantime, the life tenant has the right to enjoy the benefits of ownership of the property, including income derived from rent or other uses of the property, during his or her period of possession of the property.
Then depending on the instructions of the original property owner, these rights may revert to the original owner, or pass to another person, upon the death of the life tenant.
Although the life tenant is not allowed to sell the property or leave it to anyone in a will, the life tenant pays all property taxes and insurance while in possession of the property.
A life estate can be used by parents as an estate planning tool, especially if they have only 1 property to bequeath to their children.
1. Making the child the life tenant of the property
A common example of a life estate is when a parent transfers a property to the child for the life of the child, so that the child can live in it after the parent has passed away.
At the same time, the parent identifies the next person in line to own the property after the child living in it dies.
2. Making the parent the life tenant of the property
The parent could also choose to transfer the property to the child (while the parent is still alive) and the child could then enter into a life estate agreement to grant the property to his parent.
In such a case, the parent would be the life tenant and be entitled to live in the property for the rest of his life. The child would have a future interest in the property after his parent passes on. This is because upon the passing of the parent, the parent’s interest in the property will revert to the child.
This arrangement would also save the child from applying for a grant of probate in the future.
This is because the child already holds an interest in the property upon the passing of the parent and would not need a grant of probate to effect the transfer of the property to himself.