Richard Ostle, Private Client Partner, discusses whether executors can buy a property from the deceased’s estate.
If you are an executor of a deceased person’s estate, or if you are making a will and thinking about who you would like to appoint as your executor, you should be aware of the strict rules which limit the ability of executors to purchase property from an estate they are handling.
We often come across situations where a parent appoints their children as executors in their will, and also hopes that one of the children may be able to keep the family home, by ‘buying out’ their siblings once the parent has died.
Buying and selling property can be complex and fraught at the best of times – and it may be natural to assume that a ‘family arrangement’ is simpler than a sale to an unconnected third party. However in fact if the purchaser is also an executor of an estate, and is looking to buy a property, or a share of a property, that forms part of that estate there are additional legal considerations which need to be understood.
One in particular that is little known and often overlooked, but which can have very significant consequences, is called the “self-dealing rule”.
The self-dealing rule is a long-standing doctrine designed to protect the beneficiaries of a trust or estate. It imposes legal restrictions on trustees and executors preventing them from “dealing” with trust or estate property; and this includes them purchasing property from the trust or estate.
The idea behind it is that trustees and executors are under a duty to administer the trust or estate without abusing their position or profiting from it. If they were permitted to deal with the property as they saw fit then it is possible that this could conflict with their duty to act in the best interest of the estate overall. At its simplest, the rule provides that the buyer of the property cannot also be the person, or one of the people, who has the power to set the sale price.
The risks of falling foul of the rule cannot be overstated – if it is not properly complied with then the other beneficiaries of the estate can ‘void’ the transaction at any time in the future, without having to show that they have suffered any loss, and even if they agreed to the sale at the time.
So, for example, if you are the executor of a will and also one of two beneficiaries and you agree to purchase the other beneficiary’s share of a property which is within the estate, if you do not comply with the self-dealing rule then the other beneficiary could effectively overturn that transaction many years into the future, regardless of whether you paid them full market value for their share and have lived at the property ever since! The courts will apply the rule at the request of the other beneficiary regardless of how much time has passed, whether the transaction was fair at the time, and regardless of the impact on you as the purchasing party.
It is clear that getting this wrong can have very serious consequences. But with proper planning and advice, the problem can be avoided in most cases. If you wish to purchase an estate property, you may prefer not to be an executor – and in some cases if that is the ultimate intention it may be better to appoint independent third parties, such as professional executors to carry out that role.
It is also possible for the rule to excluded if the will is worded correctly from the outset, but we would still recommend exercising extreme caution when seeking to rely on a clause which seeks to exclude the rule – often the wording is inadequate to properly get around it.
If the will contains no such exclusion then, as executor, you may still be able to purchase the property safely, but there is a precise procedure that must be followed to ensure the beneficiaries whose shares you are buying give what is called “informed consent”. This is not the same as them just agreeing in writing that they are happy with the deal – instead it involves ensuring that all parties to the transaction are legally represented and the proper procedures are followed. If any of the beneficiaries lack mental capacity or are minors then there are additional obstacles that must be overcome.
So, if you are an executor or trustee thinking of buying property from an estate or trust you are handling then we strongly recommend that you seek legal advice from a specialist trusts and estates solicitor beforehand.