Can a Trustee Sell Real Estate in a Trust?

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Whether a Trustee can sell property in a trust depends on the terms of the trust. “Maybe” may seem like a common attorney refrain to frustrate clients, but the powers of a Trustee depend either on the terms of the trust, the purpose of the trust and New York’s Estates, Powers and Trusts Law (“EPTL”). It is impossible to know whether a Trustee can sell real estate in a trust without reviewing the trust.

The trust document dictates what happens with the property, both during the grantor’s lifetime and after their death. It is well-established that a Trustee is able sell real estate in a trust even though the trust instrument is silent on the subject because EPTL §11-1.1specifically allows for this power. Under EPTL §11-1.1(5)(B), a Trustee has the right to sell property “in the absence of contrary or limiting provisions…in [the trust] instrument.”  A Trustee has a fiduciary duty to beneficiaries and must sell the property at fair market value, as well as avoid self-dealing and conflicts of interest.

What Type of Trust is it?

If the trust is a simple revocable living trust used to avoid probate, the grantor and the Trustee are one and the same individual. There are no restrictions as to what the Trustee can do – Trustees can buy and sell property in the name of the trust at any time. In such cases, the Trustee has two choices. The Trustee can either sell the real property as the Trustee and deposit the sale proceeds into a trust account or transfer the title to themselves (as beneficiary) and then sell it.

An irrevocable trust, on the other hand, cannot be amended or revoked by the grantor without the consent of the beneficiaries. If an irrevocable trust owns real estate, absent any limitations in the trust instrument itself, a Trustee can sell property within the boundaries of the “prudent investor rule.” However, context does matter.

If the only asset in the trust is a vacation home for the benefit of the grantor’s descendants, the Trustee would not be acting within the purpose of the trust to unilaterally sell the property. In such a case the Trustee would need the signed consent of all beneficiaries. The proceeds from the sale would then have to be distributed according to the terms of the trust.

An important question is whether a grantor or beneficiary has a life estate in the property? Certain irrevocable trusts, such as an Medicaid Asset Protection Trust, give the grantor and their spouse the right to live in a residence during their lifetime. If that’s the case, then the Trustee cannot sell the property – at least not without the permission of the grantor.

How to Sell Property in a Trust?

When selling property held in trust, the net proceeds from the sale must be distributed into an account titled in the name of the trust. It is a good idea to ensure this account is open prior to the sale so there are no issues in depositing the proceeds once the sale is finalized.

Where do the Sale Proceeds Go?

A Trustee has the duty to make trust property productive.  A trustee must prudently reinvest the sale proceeds that is profitable to the trust beneficiaries.  Just like the trust directs the administration of real property held by the trust, so too must the sale proceeds be administered pursuant to the terms of the trust. For example, a Medicaid Asset protection Trust restricts distribution of principal to the grantor. The same restriction applies to the proceeds from the sale. The Trustee may, however, be able to use the proceeds to buy a substitute property, subject to the terms of the trust.

The Trustee must also determine the tax implications of selling real estate held in the trust. The type of trust determines the tax implications of selling the property. For example, if the trust is a Grantor trust, such as a Medicaid Asset Protection Trust, the grantor will be taxed on the capital gains from the sale. If the property is the grantor’s primary residence, the grantor is entitled to the $250,000 individual capital gains exclusion. Furthermore, with a grantor trust, if the proceeds are then invested, any income generated will is taxed to the grantor.

A Trustee needs to understand the terms of a trust to act properly as a fiduciary. If a Trustee has any doubts as to their powers or responsibilities, they should consult an estate planning attorney. A Trustee that acts contrary to the terms of the trust can be held personally liable.

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Burner Law Group, P.C.

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