Trustee Selling Trust Property to a Daughter- Is the Sale Valid, Can You Remove the Trustee and Can You Get a Surcharge

The trustee’s sale of trust property to a daughter may be considered a conflict of interest and breach of fiduciary duty when proven that such sale resulted to losses for the trust. On its face, the sale to the daughter will not be considered as misconduct, unless it is proven that such negligent act or misconduct of the trustee resulted to financial losses to the trust. Matter of Parisi, 2011 NY Slip Op 52429(U) (1998).

A potential conflict of interest between a fiduciary and an interested party does not warrant the denial of letters to, or removal of, a fiduciary. It is actual misconduct, and not a conflict of interest, that justifies removal of a fiduciary. Matter of Marsh, 179 A.D.2d 578 (1992)

Is the transaction valid?

Generally, any sale made by the trustee is considered valid until challenged by a beneficiary or an interested party. Under EPTL § 11-1.1(b)(5)(b), the fiduciary, absent any limitations in his appointment, may sell real estate (not specifically devised) at a public or private sale, and on such terms as in the opinion of the fiduciary will be most advantageous to the beneficiaries. The consent of the beneficiaries is not required to the sale, but it is prudent for the trustee to get releases or waivers from the beneficiaries so that he may not be considered personally liable for any surcharge in case it is found that the sale price is lower than the appraised value.

Can you remove the trustee for selling trust property to a daughter?

The grounds for removing an trustee are provided in SCPA § 711. If the trustee sold the property to himself, his spouse, or an entity he controls, it is considered self-dealing, and if he sold it without court approval, the trustee is liable for misconduct. However, the sale to the daughter will only be considered as misconduct if shown that such sale was prejudicial to the trust. With proof of financial loss to the trust, the trustee can be removed for wasting or improperly applying the trust assets. If the trust could have gotten a higher price than the price the trustee sold it to the daughter, then the trustee is liable.

Can you get a surcharge?

A surcharge is a charge imposed by the court to be paid by the fiduciary (trustee, administrator, or trustee) from his personal funds based on losses incurred by the trust or trust due to the fiduciary’s negligence or misconduct.

In order to prove entitlement to surcharge, one must prove that the trust suffered losses due to the fiduciary’s negligence or misconduct. To prove that the sale to the daughter financially damaged the trust, one must show a third-party independent appraisal of the property showing a higher amount than the sale price. This will be sufficient evidence to surcharge the trustee with the amount of loss.

In addition, if proven that the trust suffered losses, the trustee may be held liable for attorney’s fees. Because of the trustee’s negligent act or misconduct, the trustee will not able to use trust assets to pay for his attorney’s fees. 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).

Whether you are an interested party who suspects that the trustee has committed self-dealing transactions or has caused financial losses to the trust, or you are a trustee who is wrongly being accused of wrongdoing, we at the Law Offices of Albert Goodwin, are here for you. You can call us at 1-800-600-8267 or send us an email at [email protected].

The No-Further-Inquiry Rule in Detail

The no-further-inquiry rule is the cornerstone of fiduciary law's response to self-dealing. When a fiduciary engages in self-dealing or transactions with close family members, the court does not examine whether the transaction was fair or whether the beneficiaries suffered loss. The transaction is voidable based solely on the relationship.

The rule applies regardless of:

• Whether the trustee acted in subjective good faith.
• Whether the price was reasonable or even above market.
• Whether the trust actually suffered a loss.
• Whether the trustee had legitimate reasons for selecting the daughter as the buyer.
• How transparent the trustee was about the transaction.

None of these factors save the transaction. The relationship between the trustee and the buyer is sufficient to trigger the rule.

Why Children Are Treated as Self-Dealing Counterparties

The relationship between a fiduciary and the fiduciary's child creates the structural conflict that the self-dealing rule addresses. The trustee's daughter is not a true arm's-length counterparty:

• The trustee has a natural inclination to favor the daughter.
• The daughter may have access to information about the property that other buyers do not.
• The trustee may set the price or terms based on the family relationship rather than market forces.
• The trustee may discount or waive the daughter's obligations in ways that other buyers would not enjoy.
• The trustee's judgment about whether to accept a competing offer is affected by the family connection.

Each of these structural concerns supports treating the daughter sale as self-dealing.

Indirect Self-Dealing through Intermediaries

Sales through intermediaries do not avoid the rule. The court will look at the substance of the transaction:

• Sale to a friend who immediately resells to the daughter.
• Sale to a corporation in which the daughter has an ownership interest.
• Sale to a trust in which the daughter is a beneficiary.
• Sale through 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:

• The trustee's relationship to the trust.
• The transaction occurred.
• 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 loss. The relationship triggers the rule. The trustee then bears the burden of establishing an exception.

Procedure for Setting Aside the Sale

To void the transaction, the beneficiary typically follows these steps:

1. Investigate and document the transaction, including obtaining the deed, sale documents, and any related records.
2. Demand voluntary unwinding through formal demand letter.
3. If refused, file a petition in Surrogate's Court seeking an order voiding the sale.
4. Engage in discovery to develop the case.
5. Move for summary judgment or proceed to trial if needed.
6. Obtain a decree voiding the sale and providing for return of the property.

The Surcharge Calculation

When the property cannot be recovered, the remedy becomes a monetary surcharge:

• The difference between the sale price and fair market value at the time of sale.
• Subsequent appreciation the trust would have captured.
• Profits the daughter (and through her the trustee) realized from the property.
• Pre-judgment interest on the loss amount.
• Attorney's fees in some circumstances.
• Forfeiture of the trustee's commissions for the relevant period.

Tracing and Recovery of Property

If the property has been transferred again, the beneficiaries may be able to trace it through subsequent 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 this protection.

Tracing involves 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 under tracing principles.

Defending a Self-Dealing Sale

If a self-dealing sale is challenged, the available defenses are narrow:

• 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.
• Court approval. Pre-approval by the court with full disclosure typically bars later challenges.
• Statute of limitations. If too much time has passed, the challenge may be time-barred.
• Laches. Beneficiary knowledge and unreasonable delay may bar relief.

Preventing Self-Dealing Issues

For trustees who want to avoid self-dealing problems:

• Do not sell trust property to your daughter, spouse, or other family members at all.
• If a family member wants the property, have it independently appraised and marketed publicly, with the family member bidding alongside other potential buyers.
• Document the entire marketing process so the eventual sale is clearly arm's-length.
• If unique circumstances require a related-party sale, obtain court approval in advance with full disclosure to all beneficiaries.
• Consider resigning if a family member's interest in the property creates a continuing conflict.
• Consult counsel before any transaction that might raise self-dealing concerns.