Beneficiary Buying Property From a Trust

Generally, a beneficiary can buy property from a trust, subject to certain procedures and provisions that may be provided in the trust document.

Restrictions in Trust Documents

Whether or not a beneficiary can buy trust property will first depend on the provisions of the trust document. Although not very common, the trust document may prohibit the sale of trust property for a particular period of time or to a particular person or may prohibit the trustee from committing certain acts, which may include selling trust property. However, if there is no express prohibition in the trust document, the general rule is that trust property may be sold with the proceeds managed by the trustee.

Restrictions By Law

There may be restrictions to the sale of trust property, especially when these restrictions are made by court order. For example, if there is a lien on trust property, the property can only be sold, subject to the lien. If the trust property is restrained from being sold through a preliminary injunction or temporary restraining order issued by the court, the property cannot be sold to the beneficiary because it will be in violation of a court order. Reviewing the particular circumstances of each case is important when determining whether a beneficiary can buy trust property.

Procedure in Selling Trust Property to Beneficiary

In any sale of trust property, it is important to know its fair market value. The best way in determining this is by having the property independently appraised. An independent appraisal of trust property will erase any doubts from the other beneficiaries that trust property is being sold by the trustee below market value.

Once the fair market value is determined, the beneficiary-purchaser and trustee can now negotiate the terms of the purchase. The trustee is bound to avoid any perception of conflict of interest and to ensure that he is always acting for the best interest of the trust. For this reason, the trustee should always secure the best terms for the sale from the beneficiary-purchaser.

Once the terms are agreed upon, the beneficiary and trustee can document the purchase through a document or deed of sale. The sale may need to be notarized, witnessed, and/or recorded depending on the type of property involved.

Most of the time, the trustee does not need to secure the consent of the other beneficiaries in selling trust property. However, if any beneficiary feels that sale was made with conflict of interest, below market value, or to the detriment of the trust and the other beneficiaries, they may question the sale in court and may request that any damages be charged to the trustee.

For the reason, the trustee may wish to consult an experienced trust attorney before selling trust property. Trust matters may be complex and require careful planning and adherence to legal requirements. Should you have any issues regarding trust matters, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].

The Self-Dealing Concern

The classic concern with sales between a trust and a beneficiary is self-dealing. Self-dealing in the strict sense means a transaction between the trust and the trustee personally — the trustee buying from or selling to themselves. New York law generally prohibits such transactions without court approval, even when the price is fair, because the structural conflict of interest creates appearance issues that undermine confidence in the trustee's administration.

Sales between the trust and a beneficiary who is not the trustee are different. The trustee has no personal financial interest in the transaction (other than ordinary administration). The beneficiary is acquiring property the beneficiary may eventually have received in distribution anyway. But the trustee still has fiduciary duties to all beneficiaries, including those who are not the purchaser. The transaction must be at fair value to protect the non-purchasing beneficiaries' interests.

When the Trustee Is Also a Beneficiary

The harder case is when the trustee is also the beneficiary who wants to buy the trust property. This is not uncommon — family member trustees are often also family member beneficiaries. The transaction now has both a self-dealing element (the trustee is on both sides) and a beneficiary-purchase element.

For these transactions, court approval is strongly advised. The trustee files a petition asking the Surrogate's Court to approve the proposed sale. The petition includes:

• The trust document and authority.
• The proposed buyer's identity and role (trustee and beneficiary).
• The property and its appraised value.
• The proposed price and terms.
• The trustee's analysis of why the sale is in the trust's best interest.
• Consent from other beneficiaries if obtained.

The court reviews the petition, hears from other beneficiaries, and either approves or rejects the sale. A court-approved sale protects the trustee from later claims of self-dealing.

Fair Market Value Determination

The cornerstone of any sale between a trust and a beneficiary is fair market value. The value should be established through methods that the other beneficiaries cannot reasonably question:

Independent appraisal. A licensed appraiser with no relationship to the trustee or the beneficiary-purchaser provides a written appraisal supporting the value. The appraiser's qualifications, the date of the appraisal, and the methodology used should all be documented.

Comparable sales. Recent sales of similar properties in the same market area provide additional support for the value. The trustee should document the comparables.

Multiple opinions. For high-value properties or in contentious situations, obtaining multiple appraisals or broker opinions strengthens the record.

Open market test. Listing the property publicly for a defined period and accepting the highest bid (which may turn out to be the beneficiary's) is the strongest evidence that the price reflects market value. This is sometimes worth doing even when the beneficiary is the expected buyer.

Pricing Considerations Beyond Market Value

The fair market value is the starting point, but other considerations may affect the appropriate price:

• Sale costs. An open-market sale incurs broker commissions, marketing costs, and transaction time. A direct sale to a beneficiary avoids these costs. Some trustees price the direct sale at fair market value less the broker commission that would have been paid, sharing the savings with the buying beneficiary. Other trustees price at full fair market value and treat the savings as a windfall for the trust.
• Risk transfer. An open-market sale exposes the trust to time-on-market risk and market volatility. A quick direct sale eliminates that risk. The trustee should consider whether this is worth a slight discount.
• The beneficiary's distribution interest. If the beneficiary would eventually receive the property in distribution, the sale is essentially advancing the distribution. The pricing should account for the timing of the distribution.
• Tax considerations. The basis the trust has in the property and the basis the beneficiary will have after purchase affect the after-tax value of the transaction.

Financing the Purchase

How the beneficiary pays for the property matters. Options include:

• Cash purchase. The cleanest option. The beneficiary pays the trust the full price, and the trust deeds the property to the beneficiary.
• Bank financing. The beneficiary obtains a mortgage from a third-party lender. The trust receives full cash at closing.
• Seller financing. The trust holds a mortgage from the buyer-beneficiary for part or all of the purchase price. The buyer pays principal and interest over time.

Seller financing requires careful drafting. The mortgage should be at market interest rates, with reasonable terms, and properly secured. Below-market interest creates imputed interest and potential gift tax issues. Inadequately secured loans put the trust at risk if the borrower defaults.

Notice to Other Beneficiaries

Even when not legally required, providing notice to other beneficiaries before completing a beneficiary-purchase transaction is good practice. The notice:

• Identifies the property and the proposed buyer.
• Discloses the proposed price and terms.
• Provides the appraisal or other valuation supporting the price.
• Gives the other beneficiaries an opportunity to comment or object.
• Establishes a record that the transaction was disclosed.

Other beneficiaries who do not object after notice generally cannot complain later. Beneficiaries who object before completion give the trustee the opportunity to address the concerns or seek court approval before proceeding.

Documenting the Transaction

The closing documents should reflect all the protective steps taken:

• The trust authority for the sale.
• The appraisal supporting the price.
• Records of notice to other beneficiaries.
• Any court order approving the sale.
• The deed conveying the property.
• The settlement statement showing the financial terms.
• Receipts and releases from the trust to the beneficiary regarding the transaction.

Strong documentation makes the transaction defensible. Weak documentation creates exposure for the trustee if questions arise later.