Keeping it in the family: self- dealing is as dangerous as it sounds
BY SUSAN REID AND MALCOLM CAMERON – JUL 05, 2024 8:30 AM AEST
Snapshot
- A transaction in which an executor acquires property from the estate is high in risk.
- Solicitors acting for executors need to understand the rule against self-dealing.
- One solicitor is unlikely to be enough for the transaction to stand.
The family home is the main asset which most people leave when they die. Across much of New South Wales, the family home is an asset of considerable value – enough to ensure that any dealings with it in the context of a deceased estate are given careful attention.
A fairly common situation might look like this:
- an elderly mother and father pass away, leaving an estate which includes an unencumbered suburban home;
- almost all of the residuary estate is left to the three adult children (who are also the executors), with small fractional interests to more distant relatives;
- quite apart from its financial worth, the family home has sentimental value to the family;
- one of the adult children has the means and the desire to buy the property from the estate;
- the two other children agree to have the estate sell the property to their sibling;
- arms’ length valuations are obtained and the property is sold to one of the three adult children for a price based on the valuation
What appears to be a simple matter, with the home remaining in the family, in fact carries the seeds of trouble for any solicitor involved in advising the executors.
The rule against self-dealing and its exceptions
An executor stands in the position of a fiduciary with respect to the estate, akin to that of a trustee.
The general rule is that a trustee must not purchase the trust property unless they do so with the assent of all beneficiaries or pursuant to an express power contained in the will.
If they do, the transaction may be set aside even without evidence the trustee took improper advantage of their position as trustee and even if the terms were fair and generous ( J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia at [1743]).
Neither relying on an express power nor obtaining the assent of all beneficiaries is an easy pathway for an executor to tread should they wish to purchase property from the estate.
Express power contained in the will
In Carrington v Wallace [2022] NSWSC 1078, Ward P (sitting at first instance) considered a will which empowered the executors:
“To purchase all or any part of an Asset of my Estate at a value determined by a qualified valuer and on terms that would be granted to an arm’s length purchaser from my Estate.’
The deceased died in December 2015 leaving three adult children (two sons and a daughter) who were to share equally in the residuary estate. The executors were one of the sons and the daughter’s ex-husband.
The executors obtained a valuation of the estate property for $480,000 in January 2016. A bank carried out a kerbside valuation in May 2016 which returned the same result.
The executor son wanted to buy the property. He initially offered $450,000 and later $465,000.
The later offer seemed attractive to his co-executor: the co-executor thought an open market sale would cost the estate about $20,000 in fees, leaving a net of around $460,000 if the valuation was right. In a private sale at $465,000, the estate would retain the whole of the sale price.
The other beneficiaries did not consent to a sale on that basis. After months of correspondence, the ex-husband executor sold the property to the executor son for $465,000 in February 2017, relying on the power in the will.
The sale did not survive the Court’s scrutiny.
Ward P held that the will only permitted sale to an executor on the strict terms of the will, which required the sale be at a ‘value determined by a qualified valuer’ and ‘on terms that would be granted to an arm’s length purchaser’.
The sale price of $465,000 was less than the two valuations so the first element was not satisfied. Because of that, her Honour did not find it necessary to decide whether reliance could be placed on the January 2016 or May 2016 valuations in support of a sale made in February 2017 (at [223]).
Assent of the beneficiaries
There is no breach of the rule against self-dealing if ‘it is established by “clear affirmative proof ” that the beneficiaries assented to the transaction with full knowledge of all the circumstances’ (Carrington v Wallace per Ward P at [226]).
- consent must be obtained from every beneficiary whose interest in the estate may be affected by the sale, no matter how small their interest; and
- consent cannot be pro forma or obtained casually: it must be fully informed (which must in turn be capable of ready proof ).
The executor’s solicitor should advise the executor of their obligation to not undertake the sale unless they have fully informed consent of all beneficiaries (absent some permissive clause in the will).
The executors should take care to ensure they communicate openly with all beneficiaries. If consent is being sought, they should counsel the beneficiaries to obtain independent advice and ensure the beneficiaries (or those acting for them) are provided with all available information to allow them to consider whether or not to consent.
If there is a sale, it should be pursuant to a proper contract for sale as if to a third party. But, more broadly, in that position should consider whether the transaction is in the best interests of the estate and their executor clients. They may wish to counsel the executors to consider alternative ways of realising the full value of the estate property · even if (and perhaps especially if ) one of the executors is determined to buy the property. This would have the added benefit of avoiding any risk of embroiling the executors and the estate (and perhaps even the solicitors) in a dispute over whether or not the steps taken were sufficient to avoid the prima facie breach of fiduciary duty involved in every sale to an executor.
This article originally appeared on lsj.com.au