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Trustee Selling Trust Property to a Daughter- Is the Sale Valid, Can You Remove the Trustee and Can You Get a Surcharge
A trustee’s sale of trust property to his daughter may be a conflict of interest and a breach of fiduciary duty when it is shown that the sale caused a loss to the trust. On its face, the sale is not treated as misconduct unless the trustee’s negligence or misconduct is proven to have caused the trust financial loss. Matter of Parisi, 2011 NY Slip Op 52429(U). A potential conflict of interest between a fiduciary and an interested party does not by itself warrant the denial of letters to, or the removal of, the fiduciary; it is actual misconduct, not a conflict of interest, that justifies removal. Matter of Marsh, 179 A.D.2d 578 (1992). This page explains when the sale can be set aside, when the trustee can be removed, and how a surcharge is measured, from the point of view of a beneficiary who suspects self-dealing and of a trustee who has to answer the accusation.
Is the transaction valid?
Generally, a sale made by the trustee is treated as valid until a beneficiary or other interested party challenges it. Under EPTL § 11-1.1(b)(5)(b), a fiduciary, absent any limitation in the instrument, may sell real estate that is not specifically devised at public or private sale, on such terms as in the fiduciary’s opinion will be most advantageous to the beneficiaries. The beneficiaries’ consent to the sale is not required, but it is prudent for the trustee to obtain releases or waivers from them so that he is not held personally liable for a surcharge if the sale price later turns out to be lower than the appraised value.
Can you remove the trustee for selling trust property to a daughter?
The grounds for removing a trustee are set out in SCPA § 711. If the trustee sold the property to himself, his spouse or an entity he controls, that is self-dealing, and if he did so without court approval he is liable for misconduct. A sale to the daughter, however, is treated as misconduct only if it is shown to have been prejudicial to the trust. With proof of financial loss, the trustee can be removed for wasting or improperly applying trust assets: if the trust could have obtained a higher price than the trustee accepted from his daughter, the trustee is liable. Our pages on removing a trustee and trustee removal proceedings cover the procedure.
Can you get a surcharge?
A surcharge is an amount the court orders a fiduciary (executor, administrator or trustee) to pay from his own funds, based on losses the trust suffered through his negligence or misconduct. To obtain one, the beneficiary must prove that the trust lost money because of the fiduciary’s negligence or misconduct. To show that the sale to the daughter damaged the trust, the beneficiary produces an independent third-party appraisal showing a value higher than the sale price; that is sufficient evidence to surcharge the trustee with the difference. See our page on fiduciary surcharge.
If loss to the trust is proven, the trustee may also be held liable for attorney’s fees, and because of his negligent act or misconduct he will not be able to use trust assets to pay his own lawyer. Application of Linda Milea, Beneficiary of the Alice M. Amos Revocable Trust v. Hugunin, et al., Individually and as Trustees of the Alice M. Amos Revocable Trust, 2009 NY Slip Op 51422(U); Giblin v. Murphy, 73 N.Y.2d 769 (1988); Yochim v. Mount Hope Cemetery Association, 163 Misc.2d 1054 (1994).
The No-Further-Inquiry Rule in Detail
The no-further-inquiry rule is the foundation of fiduciary law’s response to self-dealing. When a fiduciary engages in self-dealing or transacts with close family members, the court does not examine whether the transaction was fair or whether the beneficiaries suffered loss; the transaction is voidable on the strength of the relationship alone. It does not matter that the trustee acted in subjective good faith, that the price was reasonable or even above market, that the trust suffered no loss, that the trustee had legitimate reasons for choosing the daughter as buyer, or how transparent he was about the deal. None of those factors saves the transaction.
A child is treated as a self-dealing counterparty because the trustee’s daughter is not a true arm’s-length buyer. The trustee has a natural inclination to favor her; she may have information about the property that other buyers lack; the trustee may set the price or terms on the basis of the family relationship rather than the market; he may discount or waive her obligations in ways other buyers would not enjoy; and his judgment about whether to accept a competing offer is colored by the family connection. Each of those structural concerns supports treating the sale as self-dealing.
Routing the sale through an intermediary does not avoid the rule. The court looks at the substance of the transaction, whether it is a sale to a friend who immediately resells to the daughter, a sale to a corporation in which she holds an interest, a sale to a trust of which she is a beneficiary, or a series of transactions designed to obscure the connection. If the ultimate beneficiary is the daughter, the rule applies regardless of the intermediate steps.
The Beneficiary’s Burden of Proof
The beneficiary challenging the transaction must prove only three things: the trustee’s relationship to the trust, that the transaction occurred, and that the transferee was the trustee or a related party such as the trustee’s daughter. The beneficiary does not have to prove that the price was below market, that the trustee acted in bad faith, or that the trust suffered a loss. The relationship triggers the rule, and the burden then shifts to the trustee to establish an exception.
Procedure for Setting Aside the Sale
To void the transaction, the beneficiary typically follows these steps.
- Investigate and document the transaction, obtaining the deed, the sale documents and any related records.
- Demand voluntary unwinding by formal demand letter.
- If the demand is refused, file a petition in Surrogate’s Court for an order voiding the sale.
- Conduct discovery to develop the case.
- Move for summary judgment, or proceed to trial if the facts are disputed.
- Obtain a decree voiding the sale and providing for the return of the property.
The Surcharge Calculation
When the property cannot be recovered, the remedy becomes a monetary surcharge. It can include the difference between the sale price and fair market value at the time of sale, the subsequent appreciation the trust would have captured, the profits the daughter (and through her the trustee) realized from the property, pre-judgment interest on the loss, attorney’s fees in some circumstances, and forfeiture of the trustee’s commissions for the relevant period.
Consider a simplified New York example. A trust holds a two-family house in Brooklyn. The trustee sells it to his daughter for $700,000. A beneficiary obtains an independent appraisal establishing that the fair market value on the sale date was $900,000. The price gap of $200,000 is the baseline loss the court may surcharge to the trustee, and the court may add statutory interest at 9% under CPLR 5004 from the date of the improper sale. If the daughter later resold the property for $1,050,000, the court could instead order disgorgement of the resale profit, so that the trust, not the trustee’s family, receives the benefit of the appreciation.
Tracing and Recovery of Property
If the property has been transferred again, the beneficiaries may be able to trace it through the later transfers and recover it from third parties who took with notice of the self-dealing. The bona fide purchaser doctrine protects innocent buyers, but actual or constructive notice of the underlying breach defeats that protection. Tracing means following the property and its substitutes through subsequent transactions: if the daughter used the property as collateral for a loan, or sold it and used the proceeds to buy a different asset, the trust may have claims against the new asset.
Defending a Self-Dealing Sale
If a self-dealing sale is challenged, the available defenses are narrow.
| Defense | When it works |
|---|---|
| Trust document authorization | Some instruments expressly authorize transactions with family members. The language must be specific. |
| Beneficiary consent | If all beneficiaries consented after full disclosure, the consent may bar the challenge, subject to the limits discussed below. |
| Court approval | Pre-approval by the court, on full disclosure, typically bars a later challenge. |
| Statute of limitations | If too much time has passed, the challenge may be time-barred. |
| Laches | Beneficiary knowledge combined with unreasonable delay may bar relief. |
Can the Beneficiaries Consent to or Ratify the Sale?
New York recognizes that a self-dealing transaction can be ratified if all affected beneficiaries consent after full disclosure, but the courts scrutinize such consent closely when the buyer is a member of the trustee’s family. Under Flaum v. Birnbaum, 120 A.D.2d 183 (4th Dep’t 1986), even a consented-to self-dealing transaction remains voidable if the trustee failed to disclose material facts he knew or should have known, used the influence of his fiduciary position to induce the consent, or the transaction was not in all respects fair and reasonable. If the trustee did not reveal the family relationship with the buyer or the property’s true value, or pressured a beneficiary into consenting, the consent will not save the transaction.
Additional Statutory Grounds and Remedies
Beyond SCPA 711, several other New York statutes come into play when a trustee sells trust property to a family member.
| Statute | Effect |
|---|---|
| SCPA 719 | Permits the court to remove a fiduciary without a full hearing in certain circumstances, including where the fiduciary has mingled trust funds with his own or the record otherwise establishes a breach of duty. |
| EPTL 11-2.3 (Prudent Investor Act) | Reinforces the trustee’s obligation to act impartially, administer the trust solely in the beneficiaries’ interest, and avoid conflicts. |
| EPTL 11-1.6 | Prohibits a fiduciary from commingling trust property with personal property, which is often implicated when a trustee channels trust assets to a family member. |
A petition to remove the trustee may be brought by a co-fiduciary, beneficiary, creditor, surety or guardian of an interested person. Removal is a forward-looking remedy that protects the trust going forward, and it is usually sought together with voiding the sale and surcharge. Conduct that often accompanies a family sale and independently supports removal includes failing to account, commingling the sale proceeds, mismanaging the remaining trust assets, and refusing to comply with court orders.
Preventing Self-Dealing Issues
For a trustee who wants to stay out of this trouble, the simplest rule is not to sell trust property to a daughter, spouse or other family member at all. If a family member wants the property, have it independently appraised and marketed publicly, with the family member bidding alongside other buyers, and document the whole marketing process so the eventual sale is clearly arm’s-length. If circumstances genuinely require a related-party sale, obtain court approval in advance with full disclosure to all beneficiaries. A trustee whose family member’s interest in the property creates a continuing conflict should consider resigning, and should consult counsel before any transaction that might raise a self-dealing concern.
Talk to a New York Trust Attorney
If you are a beneficiary who suspects the trustee has sold trust property to a family member on terms that hurt the trust, or a trustee who is being accused of self-dealing over a sale you believe was fair, we can review the documents and tell you where you stand. Call the Law Offices of Albert Goodwin at 212-233-1233 or write to [email protected].
About the Author
Albert Goodwin Esq. is a licensed New York attorney with over 18 years of courtroom experience. His extensive knowledge and experience make him well-qualified to write authoritative articles on a wide range of legal topics. He can be reached at 212-233-1233 or [email protected].
