Can an Executor Sell Estate Property to a Family Member in New York? Spouse, Child, Sibling and Self-Dealing Rules

By Albert Goodwin, Esq., New York estate attorney. Last reviewed: [month year].

An executor in New York may sell estate property to a relative. The sale is lawful if it is made at fair market value, after genuine exposure to the market, and if the executor does not personally gain from it. The closer the buyer's finances are to the executor's own, the harder the court looks at the sale, and the less the objecting beneficiary has to prove. This guide covers each type of buyer: the executor's spouse, child, sibling or parent, the executor's own company, and the executor personally. It also shows how a surcharge is calculated, how to ask the Surrogate's Court for advance approval under SCPA 2107, and what records an executor should keep.

The executor's power to sell and the duty that limits it

Under EPTL 11-1.1(b)(5)(B), a fiduciary whose letters carry no limitation may sell real property that the will does not specifically devise, at public or private sale, on the terms the fiduciary considers most advantageous to the beneficiaries. The beneficiaries do not have to consent. The same power covers personal property, including shares in a cooperative apartment.

The power is held in trust for the beneficiaries. The Court of Appeals in Meinhard v. Salmon, 249 N.Y. 458 (1928), described the fiduciary standard as "the punctilio of an honor the most sensitive." In Birnbaum v. Birnbaum, 73 N.Y.2d 461 (1989), the court applied that standard to an executor and held that a fiduciary owes undivided loyalty and may not place himself in a position where his personal interest conflicts with the estate's without full disclosure and consent. In Matter of Rothko, 43 N.Y.2d 305 (1977), executors who sold estate paintings to a gallery in which one of them had an interest were surcharged, and the court measured the loss by the appreciated value of the property rather than its value on the date of the sale.

The question the court asks: does the executor benefit?

New York courts do not apply a fixed list of permitted and forbidden relatives. They ask whether the executor, directly or indirectly, gained from the sale. The answer places the transaction in one of two categories.

• Self-dealing: the executor is on both sides of the sale, or the buyer's gain is in substance the executor's gain. The sale is voidable at the beneficiaries' election. Under the no-further-inquiry rule, the beneficiary does not have to prove that the price was unfair. The executor's defenses are narrow: express authorization in the will, court approval obtained before the sale, or informed written consent from every affected beneficiary.
• Conflict of interest: the executor has a personal reason to favor the buyer but does not share in the buyer's gain. The sale stands unless the objecting beneficiary proves that the estate lost money because of the executor's negligence or misconduct.

Which category applies depends on facts, not labels. A sale to a spouse with whom the executor shares a household and bank accounts is treated as self-dealing because the executor's benefit is obvious. A sale to an adult child with independent finances is usually treated as a conflict of interest. A sale to a child who then repays a loan to the executor, or who holds title as a straw buyer, is self-dealing regardless of the family label.

Sale to the executor's spouse

A spouse is the clearest case of indirect benefit. Married couples in New York commonly hold property as tenants by the entirety, file joint returns and pool income. A sale of estate real estate to the executor's spouse at a discount puts the discount into the executor's household. Courts therefore treat the spouse as standing in the executor's shoes, and the beneficiary who objects generally does not have to prove a loss. The executor must show that the will authorized the sale, that the court approved it in advance, or that every beneficiary consented after full disclosure.

An executor who wants to sell to a spouse, and who does not have authorization in the will, should petition under SCPA 2107 before signing a contract. The procedure is described below.

Sale to the executor's child

A sale to an adult child is not misconduct on its face. The child is a separate person with separate finances. The objecting beneficiary must prove that the estate received less than it should have, and that the shortfall resulted from the executor's conduct. The usual proof is an independent appraisal fixing fair market value on the date of sale, compared with the contract price.

The analysis changes if the executor benefited through the child. Examples include a child who lives in the house with the executor, a child who pays the purchase price with money the executor gave or lent, a child who later transfers the property back to the executor, and a child who was a minor at the time of sale. In those situations the court treats the sale as self-dealing and the burden shifts to the executor.

Sale terms count as much as price. A contract at appraised value that gives the child seller financing at below-market interest, a long closing date with no deposit, or a waiver of a mortgage contingency that other buyers would not have received, can produce a loss to the estate even though the headline number looks right.

Sale to a sibling, parent or other relative

A sale to the executor's brother, sister, parent or cousin is analyzed the same way as a sale to a child. The beneficiary must prove a loss unless the facts show that the executor shared in the buyer's gain. The practical risk is higher when the relative is also a beneficiary of the estate, because the other beneficiaries will compare the price the relative paid with the share the relative is also receiving. If the relative is a co-beneficiary, the executor may instead distribute the property in kind to that beneficiary against his share at appraised value, with an equalizing payment, which keeps the transaction inside the accounting rather than outside it. See our page on a buyout of an inherited residence.

Sale to the executor's own company

A sale to a corporation, LLC or partnership that the executor owns or controls is self-dealing. The entity is a separate legal person, but the executor's gain through it is direct. The same is true of a sale to an entity owned by the executor's spouse. A minority interest does not cure the problem if the executor had a say in the purchase. Rothko involved exactly this pattern: a sale by executors to a gallery in which one executor had a financial stake. The sale is voidable, the executor can be surcharged for the estate's loss measured at the later, higher value, and the executor cannot charge his defense costs to the estate.

Sale to the executor personally

An executor may not sell estate property to himself unless the will expressly permits it or the court approves it in advance. A sale by an executor to himself is voidable at the beneficiaries' election without proof that the price was low. The will clause must be specific. A general clause exonerating the executor from liability does not help: under EPTL 11-1.7(a)(1), a provision that attempts to exonerate an executor from liability for failing to exercise reasonable care, diligence and prudence is void as against public policy.

Can the executor be removed?

SCPA 711 lists the grounds for removing an executor. They include wasting or improperly applying estate assets, improvidence, dishonesty and unfitness. SCPA 719 lets the court remove a fiduciary without a petition in certain cases, such as a fiduciary who disobeys a court order.

A conflict of interest, standing alone, is not a ground for removal. In Matter of Marsh, 179 A.D.2d 578 (1st Dept 1992), the court held that a potential conflict between a fiduciary and the estate, without actual misconduct, does not warrant removal. The Court of Appeals in Matter of Duke, 87 N.Y.2d 465 (1996), stressed that the testator's choice of executor is entitled to deference and that removal is a drastic remedy reserved for a clear showing of statutory grounds. A sale to a child at fair value, properly marketed, will not get an executor removed. A sale to a child at a discount that cost the estate money is a misapplication of assets and can.

Removal proceedings are covered on our page on removing an administrator or executor.

Surcharge: a worked example

A surcharge is a sum the court orders a fiduciary to pay from personal funds to make up a loss caused by the fiduciary's negligence or misconduct. It is usually imposed in an accounting proceeding after a beneficiary files objections.

Assume the following facts in a Queens County estate:

• The estate owns a two-family house in Flushing.
• An independent appraiser values it at $900,000 as of the date of sale.
• The executor sells it to her adult son for $750,000 without listing it with a broker.
• The sale closes on January 2. The executor files her account three years later.

The beneficiaries object. The court finds that the house was not exposed to the market and that $900,000 was obtainable. The surcharge is calculated as follows.

• Principal loss: $900,000 minus $750,000 = $150,000.
• Interest: the Surrogate has discretion to award interest on a surcharge and to set the rate, up to the legal rate of 9 percent under CPLR 5004. Matter of Janes, 90 N.Y.2d 41 (1997). At 9 percent simple interest for three years, interest is $40,500.
• Total surcharge: $190,500, payable by the executor personally.
• Commissions: the court may deny or reduce the executor's statutory commissions under SCPA 2307 for the misconduct.

If the facts showed that the son was a straw buyer and the executor took title back, the court would treat the sale as self-dealing. Under Rothko, the measure of damages in that case can be the value of the property at the time of the accounting, not the value at the time of the sale. If the house is worth $1,100,000 by then, the surcharge is $350,000 plus interest, or the beneficiaries can elect to have the sale set aside and the house returned.

We handle surcharge proceedings for beneficiaries and for fiduciaries. See our page on fiduciary surcharge.

The attorney's fee consequence

An executor who successfully defends an accounting may pay reasonable legal fees from the estate, subject to the court's review under SCPA 2110. An executor who is found to have breached a fiduciary duty generally may not. Fees incurred defending the executor's personal conduct, as opposed to administering the estate, are charged to the executor personally. A fiduciary who sold to a relative at a discount therefore faces three costs: the surcharge, loss of commissions, and his own legal bills.

Getting court approval first: SCPA 2107

SCPA 2107 allows a fiduciary to ask the Surrogate's Court, before acting, for direction as to the value, manner and time of sale of estate property, and for advice and direction where extraordinary circumstances make the fiduciary's course of action doubtful. A fiduciary who follows the court's direction in good faith is protected from surcharge on the matters the court decided. For a sale to a spouse, to the executor's own company, or to a child on terms a stranger would not get, this is the strongest protection available.

The petition is filed in the Surrogate's Court of the county that issued letters. It should contain:

1. A description of the property, including block and lot, and a copy of the deed or stock certificate and proprietary lease for a co-op.
2. The independent appraisal, with the appraiser's qualifications.
3. The proposed contract or term sheet: price, deposit, financing, closing date and contingencies.
4. The buyer's relationship to the executor, stated plainly, and a statement of whether the executor will receive any benefit from the sale.
5. The marketing history, if any: listing agreement, days on market, offers received.
6. The reasons the executor believes the sale is in the estate's interest, such as carrying costs, a vacant property, or a lack of other offers.
7. A list of all interested persons under SCPA 2107 and the applicable citation provisions, so that every beneficiary receives notice and a chance to object.

If a beneficiary is a minor or under a disability, the court will appoint a guardian ad litem under SCPA 403 to review the proposed sale. A decree approving the sale binds the beneficiaries who were cited. The process takes a few months in most counties and costs the filing fee plus legal fees, which are modest compared with a later surcharge proceeding.

Records an executor should keep

Without court approval, the executor's protection is the record. The following documents, kept in the estate file, prove that the sale was at arm's length.

• Appraisal: a written report by a New York State certified appraiser, dated before the listing, valuing the property as of that date.
• Listing agreement: signed with a licensed broker who is not related to the executor or the buyer.
• MLS and listing history: printouts showing the listing date, asking price, price changes and days on market.
• Showing log: the broker's record of showings and open houses.
• Offer log: every offer received, the date, the terms, and the response. Keep the written offers themselves.
• Broker affidavit: a sworn statement from the broker that the property was fully exposed to the market and that the accepted offer was the highest and best.
• Comparable sales: closed sales of similar properties in the same neighborhood within six months of the contract.
• Contract and closing statement: showing the price actually paid, the source of the buyer's funds, and that the executor received nothing beyond her commissions.
• Disclosure letters: copies of the letters sent to each beneficiary before the contract, disclosing the buyer's identity and the terms.

If the relative's offer is accepted, the file should show why it beat the alternatives. A higher net price, an all-cash offer, or a faster closing on a vacant property paying taxes and insurance are legitimate reasons. The executor should write them down at the time, not reconstruct them later.

Beneficiary releases

A release signed by a beneficiary bars that beneficiary from later objecting to the sale, but only if the release was informed. The executor must disclose the buyer's relationship, the price, the terms, and the appraisal, and must give the beneficiary an opportunity to consult a lawyer. A release obtained by concealing the buyer's identity, or by pressure, is set aside. A release from an adult beneficiary does not bind a minor, an unborn or unascertained beneficiary, or a beneficiary under a disability; those interests require court approval. Releases also do not bind creditors of the estate.

How a beneficiary challenges the sale

A beneficiary who believes the executor sold estate property to a relative at a loss has several routes.

• Compel an accounting: under SCPA 2205, a beneficiary may petition to compel the executor to account. The beneficiary then files objections to the sale and seeks a surcharge. See our page on estate accountings.
• Discovery and turnover: if the sale was self-dealing and the property can be recovered, a proceeding under SCPA 2103 and 2104 can bring the property back into the estate. See our page on discovery and turnover proceedings.
• Removal: a petition under SCPA 711, combined with a request for suspension of the executor's letters while the proceeding is pending.
• Breach of fiduciary duty: the underlying claim in each of these proceedings. See our page on breach of fiduciary duty.

The six-year period for an equitable claim against a fiduciary under CPLR 213 does not begin to run until the fiduciary openly repudiates the fiduciary relationship or the relationship ends, usually by a judicial settlement of the account. Matter of Barabash, 31 N.Y.2d 76 (1972). A sale closed years ago can still be challenged if the executor has never accounted.

New York City co-ops and condos

In Manhattan, Brooklyn and Queens, estate property is often a cooperative apartment. The executor sells the shares and assigns the proprietary lease, and the buyer must pass the board. A relative's board approval does not substitute for market exposure. The executor should still obtain an appraisal, list the apartment, and document offers. A board's rejection of an unrelated buyer at a higher price, followed by approval of the executor's child at a lower price, should be documented with the board's written decision so that the record explains the outcome. Condominium sales follow the real property rules above, with the board's right of first refusal noted in the file.

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Talk to us

If you are a beneficiary who suspects that an executor's sale to a relative cost the estate money, or an executor who is planning such a sale and wants to do it in a way that will withstand objections in the Surrogate's Court, call us at 212-233-1233 or email [email protected]. We represent clients in the Surrogate's Courts of New York City, Long Island and Westchester.