In a not unusual scenario, the deceased – say the mother of three adult children, equal 1/3 residuary beneficiaries under her will – dies having appointed one of them, a son, as the executor. He was already living with his mother and wants to retain the house, so he sells it (as executor) to himself (as buyer), at full value, and thus saves the estate agency fees and indeed the costs of two sets of solicitors. Everyone’s a winner, right?
Not necessarily. His siblings might not object and probably won’t unless one of them also wanted the house, or doubts that the sale price was correct and wants to test the market, or simply wants to make his life difficult.
The problem is a little-known rule of law called the ‘self-dealing rule’. Trustees and executors owe a fiduciary duty to the beneficiaries of the trust or estate. This means that they must act solely in the best interests of the beneficiaries, not themselves. Executors are, therefore, prohibited from benefitting personally from the estate (save as provided for in the will in relation to any inheritance or the right to charge fees) and putting themselves in a position where their interests conflict with their duties as an executor.
The self-dealing rule applies where a trustee or executor wishes to either buy an estate or trust asset or, less commonly, to sell their own property to the trust. Transactions of these types – where the seller and buyer are the same person but acting in different capacities – are contrary to the duties to avoid conflicts of interests and not to exploit a fiduciary position for personal benefit.
The case of Tito v Waddell summarises the position: “the self-dealing rule is (to put it very shortly) that if a trustee sells the trust property to himself, the sale is voidable by any beneficiary ex debito justitiae, however fair the transaction.” In other words, any one beneficiary can apply to set the transaction aside and, unless the trustee or executor can demonstrate that he has not taken advantage of his position, had made a full disclosure to the beneficiaries in advance, and that the transaction was fair and honest, the court will make such an order.
Trustees and executors should also take care when selling an asset to a buyer who is related to them, or otherwise connected in some way. While such a transaction is not directly caught by the self-dealing rule, he would have to demonstrate that the transaction was solely in the interests of the beneficiaries.
By way of exceptions to, or ways around, the self-dealing rule:
- There may be an authority given in the will.
- The other beneficiaries may agree to, in our example, the son, as executor, buying the property. All of the beneficiaries (entitled to the estate) must authorise the transaction after full disclosure by the executor and must be over 18 and of full mental capacity.
- Failing the above, a trustee or executor can seek the authority of the Court, which will authorise the transaction only if the trustee or executor establishes that the transaction is in the interests of the beneficiaries.
Great caution should always be exercised where a trustee or executor wishes to purchase trust or estate property and the appropriate legal advice should be sought at an early stage.
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