Introduction
In many California trust administrations, real estate is the trust's most valuable asset. As a result, one of the first major decisions a trustee may face is whether to sell a home owned by the trust. While beneficiaries sometimes assume that a trustee must keep the property, that is not always the case.
In many situations, selling the property may be the most practical way to carry out the instructions of the trust and complete the administration.
If you are serving as a successor trustee, you may also find it helpful to read our article, What Does a Trustee Have to Do After Death in California?, which discusses the trustee's duties and responsibilities during the trust administration process.
Short Answer
- In many California trust administrations, a trustee may have the authority to sell trust real estate.
- Whether the trustee may sell a home depends primarily on the language of the trust and the trustee's fiduciary duties.
- In some situations, selling the property is necessary to pay expenses, equalize distributions, or comply with the instructions contained in the trust.
- Beneficiary consent is not always required.
- Trustees should carefully review the trust document and consider obtaining legal guidance before selling trust property.
Why Trustees Sell Real Estate During Trust Administration
Paying Debts and Administration Expenses
In many California trust administrations, a trustee may need to sell real estate to pay expenses of the trust. For example, the trust may need funds to pay funeral expenses, debts of the deceased, property expenses, attorney's fees, accounting fees, or other administration costs.
In other situations, the trust itself may direct the trustee to sell certain assets. Some trusts instruct the trustee to liquidate all trust assets before making distributions. Others specifically direct the trustee to sell a residence or another piece of real estate.
A trustee may also decide to sell real estate to facilitate distributions to beneficiaries. For example, if a trust leaves a $1,500,000 home equally to three children, selling the property may be the most practical way to ensure that each beneficiary receives an equal share of the trust estate.
Equalizing Distributions Among Beneficiaries
A trustee may also decide to sell a home in order to facilitate distributions and reduce the likelihood of disputes between beneficiaries.
For example, one beneficiary may want to keep the family home, while another beneficiary may prefer to receive cash. In other situations, several beneficiaries may disagree about whether the property should be sold, rented, or retained for future use.
Depending on the language of the trust, the trustee may have the authority to decide how to proceed. In many situations, selling the property and distributing the proceeds equally is the simplest way to carry out the terms of the trust and avoid future disagreements.
For this reason, some trustees choose to liquidate trust assets before making distributions. Doing so may help ensure that each beneficiary receives their intended share of the trust estate while reducing the potential for conflict.
Following the Instructions of the Trust
In some situations, the trustee may sell real estate simply because the trust requires it.
For example, the trust may specifically direct the trustee to sell the settlor's residence, vehicle, or another asset before making distributions. In other cases, the trust may require the trustee to liquidate most or all trust assets and distribute the proceeds to the beneficiaries.
A trustee's primary duty is to follow the instructions contained in the trust document. Therefore, even if one or more beneficiaries prefer to keep a particular asset, the trustee may still have an obligation to sell the asset if the trust requires that result.
For this reason, trustees should carefully review the trust's distribution provisions before making any decisions regarding the sale of trust property.
Does a Trustee Need Beneficiary Approval to Sell a House?
In many California trust administrations, a trustee may have the authority to sell trust real estate without obtaining the consent of the beneficiaries. However, the trustee's authority ultimately depends on the language of the trust instrument.
Many trusts grant trustees broad powers to manage, sell, lease, and distribute trust property. As a result, a trustee may have the authority to sell a home even if one or more beneficiaries disagree with that decision.
However, a trustee's authority is not unlimited. Under California law, trustees owe fiduciary duties to the beneficiaries. For example, trustees must act in good faith, avoid conflicts of interest, and act in the best interests of the beneficiaries.
If a trustee violates those duties when selling trust property, beneficiaries may have the right to seek relief from the court. Depending on the circumstances, beneficiaries may challenge the trustee's actions and seek damages, removal of the trustee, or other remedies.
For this reason, trustees should carefully review the trust document and consider obtaining legal guidance before selling trust real estate.
What Duties Does a Trustee Owe When Selling Real Estate?
Duty of Loyalty
When selling trust real estate, a trustee must always keep their fiduciary duties in mind. One of the most important duties is the duty of loyalty. Under California law, a trustee owes a fiduciary duty to the beneficiaries of the trust and must act in their best interests.
As a result, the trustee should make decisions based on what is best for the trust and its beneficiaries rather than what is most convenient or beneficial for the trustee personally.
Duty of Impartiality
A trustee also owes a duty of impartiality to the beneficiaries. In general, a trustee should treat beneficiaries fairly and should not favor one beneficiary over another unless the trust specifically requires different treatment.
For example, a trustee should not structure the sale of trust property in a way that unfairly benefits one beneficiary at the expense of another. Instead, the trustee should focus on carrying out the instructions contained in the trust document.
Should the Trustee Obtain an Appraisal?
In many trust administrations, obtaining an appraisal before selling real estate is a prudent step.
An appraisal may help establish the property's fair market value as of the date of death. In addition, an appraisal may help protect the trustee from future claims that the property was sold for less than it was worth.
This issue is especially important in California and San Diego trust administrations, where the family home is often the most valuable asset in the trust. If a beneficiary later argues that the trustee sold the property for too little, a professional appraisal may help demonstrate that the trustee acted reasonably and in good faith.
Keep Detailed Records
Trustees should maintain detailed records regarding every aspect of the sale.
For example, trustees should keep:
- Appraisal reports
- Listing agreements
- Communications with real estate agents
- Offers received
- Counteroffers
- Escrow documents
- Closing statements
- Correspondence with beneficiaries
The sale of a home often determines the amount each beneficiary ultimately receives from the trust. For that reason, trustees should be especially careful when documenting the sale process.
Avoid Self-Dealing
In general, trustees should avoid self-dealing whenever possible.
For example, a trustee should proceed very carefully before purchasing trust property personally or arranging a transaction that benefits the trustee or a related party.
Some trust documents may authorize certain transactions that would otherwise raise self-dealing concerns. However, even when the trust permits such transactions, trustees should proceed cautiously and document the reasons for their actions.
If a trustee engages in self-dealing, beneficiaries may later argue that the trustee violated their fiduciary duties. Thorough documentation and legal guidance may help reduce the risk of future disputes.
What Happens to the Sale Proceeds?
The Trustee Does Not Immediately Distribute the Money
Many beneficiaries assume that once the trustee sells a home, the trustee will immediately distribute the sale proceeds. However, that is not always the case.
The trustee's handling of the sale proceeds will depend largely on the language of the trust and the status of the trust administration.
For example, if the trust requires the trustee to liquidate all trust assets before making distributions, the proceeds from the sale of the home will typically be deposited into the trust account and become part of the general trust estate.
Paying Trust Expenses and Debts
Before making distributions, the trustee may need to use trust funds to pay administration expenses, debts, taxes, attorney's fees, accounting fees, real estate expenses, and other obligations of the trust.
As a result, the trustee should carefully evaluate all known and anticipated expenses before distributing sale proceeds to beneficiaries.
Reserving Funds for Future Expenses
Even after the sale closes, the trustee may need to retain a portion of the proceeds in the trust account.
For example, the trustee may need to reserve funds for future tax obligations, administration expenses, or other liabilities that have not yet been fully resolved.
Final Distribution to Beneficiaries
Once the trustee completes the administration and determines that sufficient funds remain available, the trustee may distribute the remaining proceeds according to the terms of the trust.
Trustees should also keep detailed records regarding the sale proceeds and all related transactions. In some situations, the amount ultimately distributed may differ from the amount originally received from the sale because of expenses, taxes, investment gains, interest earned, or other adjustments during the administration process.
For this reason, trustees should maintain accurate records and be prepared to explain how the final distribution amounts were calculated.
Special Issues for San Diego Trust Administrations
Why San Diego Real Estate Creates Unique Challenges
One of the biggest issues trustees face in San Diego trust administrations is the dramatic increase in local real estate values over the past several decades.
Many San Diego families purchased their homes in the 1970s and 1980s for relatively modest amounts. Today, those same properties are often worth one million dollars or more. In many trust administrations, the family home is not only the most valuable asset in the trust, but sometimes the only significant asset.
As a result, trustees should carefully evaluate how the property will be handled before making any decisions regarding a sale or distribution.
Parent-Child Exclusion Considerations
One important consideration is whether any available parent-child property tax exclusions apply to the property.
Many homeowners purchased their homes decades ago and continue to benefit from relatively low property tax assessments. If the trustee does not properly evaluate available property tax exclusions, the property may be reassessed at its current value. This can result in a substantial increase in annual property taxes.
For this reason, trustees should carefully evaluate potential property tax consequences before deciding whether to sell, transfer, or distribute inherited real estate.
Should the Trustee Sell the Property?
Another common question is whether the trustee should sell the property at all.
For example, one beneficiary may want to keep the family home while another beneficiary prefers to receive cash. In other situations, a beneficiary may wish to purchase the property from the trust.
These situations can create practical and legal challenges. The trustee must consider the language of the trust, the trustee's fiduciary duties, the interests of all beneficiaries, and the fair market value of the property.
Because the family home is often the most valuable asset in a San Diego trust administration, trustees should proceed carefully and document their decision-making process. A well-informed decision early in the administration may help avoid disputes, reduce liability, and ensure that the trust is administered according to the settlor's wishes.
Common Mistakes Trustees Make When Selling Real Estate
Mixing Personal Assets With Trust Assets
One of the trustee's most important responsibilities is keeping trust assets separate from personal assets.
As a result, one of the biggest mistakes a trustee can make is commingling trust funds with personal funds. For example, a trustee should generally avoid depositing trust funds into a personal bank account or using trust assets for personal purposes.
Maintaining separate accounts and accurate records helps protect both the trust and the trustee.
Failing to Keep Beneficiaries Reasonably Informed
Under California law, trustees generally have a duty to keep beneficiaries reasonably informed regarding the administration of the trust.
If beneficiaries believe that the trustee is ignoring them, withholding information, or failing to communicate, disputes may arise. In some situations, beneficiaries may petition the court for information or seek the trustee's removal.
Regular communication can often help avoid misunderstandings and reduce the likelihood of litigation.
Beneficiaries often have questions regarding a trustee's obligations after a loved one's death. To learn more, read our article discussing trustee duties after death in California.
Favoring One Beneficiary Over Another
Trustees owe a duty of impartiality to the beneficiaries.
This duty can be difficult when the beneficiaries are family members. A trustee may naturally have closer relationships with certain beneficiaries than others. However, the trustee should avoid allowing personal feelings to influence decisions regarding trust administration.
Trustees should carefully document their decisions and ensure that they treat beneficiaries fairly and according to the terms of the trust.
Failing to Properly Manage Trust Assets
In some trust administrations, the trustee may need to hold assets for an extended period of time before making distributions.
When that occurs, the trustee has a duty to manage trust assets prudently. Depending on the circumstances, this may require the trustee to invest trust assets or obtain professional assistance regarding investment decisions.
Trustees who fail to manage trust assets appropriately may expose themselves to claims that they failed to fulfill their fiduciary duties.
Failing to Protect Real Estate
Trustees must also take reasonable steps to protect trust property.
This issue often arises when the trust owns real estate located far from the trustee's residence. For example, a California trustee may need to administer a trust that owns property in Arizona, Nevada, or another state.
In those situations, the trustee should ensure that the property remains secure, properly maintained, adequately insured, and free from unnecessary risks. Trustees should also make sure that unauthorized individuals do not access or occupy the property.
Allowing Beneficiaries to Remove Property Too Early
Another common mistake occurs when trustees allow beneficiaries to remove personal property from the home before determining how those items should be distributed.
While a trustee may wish to accommodate grieving family members, doing so can create significant problems later in the administration.
Many trusts require personal property to be distributed according to a Personal Property Memorandum, the trust terms, or an agreed-upon distribution process. If one beneficiary removes items before the trustee completes that process, other beneficiaries may later claim that the distribution was unfair.
For this reason, trustees should inventory personal property and determine the proper method of distribution before allowing beneficiaries to remove items from the residence.
Frequently Asked Questions
Can a Trustee Sell a House Without Beneficiary Consent?
In many California trust administrations, yes. Whether a trustee may sell a house without beneficiary consent depends primarily on the language of the trust.
In general, if the trust document does not prohibit the sale and the trustee complies with their fiduciary duties, the trustee may have the authority and discretion to sell trust real estate even if one or more beneficiaries disagree with that decision.
However, trustees must continue to comply with their duties of loyalty, impartiality, and prudent administration when deciding whether to sell trust property.
Does a Trustee Need Court Approval to Sell a House?
In many California trust administrations, the trustee does not need court approval to sell a house owned by the trust.
Instead, the trustee's authority is usually determined by the language of the trust document. Many trusts grant trustees broad authority to manage and sell trust assets without court involvement.
However, trustees should carefully review the trust document before proceeding with a sale. In some situations, the trust may contain restrictions or requirements that affect the trustee's authority.
What Happens if One Beneficiary Wants to Keep the House?
The answer depends on the language of the trust and the circumstances of the administration.
For example, if the trust directs the trustee to sell the property and distribute the proceeds among the beneficiaries, the trustee generally must follow those instructions.
In other situations, a beneficiary may wish to purchase the property from the trust. When that occurs, the trustee should proceed carefully. The trustee must ensure that the transaction is fair to all beneficiaries and that the property is transferred at an appropriate value.
Because these situations often involve fiduciary duties and potential conflicts of interest, trustees should strongly consider obtaining legal guidance before proceeding.
Can a Trustee Buy Property From the Trust?
In general, trustees should avoid purchasing property from the trust. Transactions between a trustee and the trust may raise concerns regarding self-dealing and potential breaches of fiduciary duty.
However, some trusts expressly authorize transactions that would otherwise be prohibited. In addition, trustees are often beneficiaries of the trust themselves, which can create situations in which a trustee may be able to purchase trust property.
Even when such a transaction is permitted, the trustee should proceed carefully. The trustee should ensure that the transaction is fair to the beneficiaries, supported by appropriate documentation, and consistent with the trustee's fiduciary duties.
Because transactions between a trustee and a trust often involve significant legal issues, trustees should strongly consider consulting a California trust administration attorney before proceeding.
What Happens if a House Was Left Outside the Trust?
The answer depends on the specific facts of the trust administration.
In some situations, a home that was left outside the trust may still be transferred into the trust through a Heggstad Petition (also known as a 850 Petition). This is most likely to occur when the home is referenced in the trust's distribution provisions, Schedule of Assets, or other trust documents demonstrating that the settlor intended the property to belong to the trust.
However, if the property is not referenced in the trust documents and no probate-avoidance procedure is available, a probate proceeding may be required before the property can be transferred.
To learn more, please read our article What Happens If Assets Are Left Outside a Trust in California?
How Long Does It Take to Sell a House During Trust Administration?
The answer depends on the property, the trust administration, and the local real estate market.
In some situations, a trustee may be able to list and sell a property within a few weeks. In other cases, the process may take several months because of beneficiary issues, title concerns, property repairs, tax considerations, or other administration matters.
Before listing a property for sale, trustees should review the trust document, evaluate any issues affecting title or ownership, and ensure that the property is ready for sale.
Final Thoughts
For many California trustees, the sale of a home is one of the most significant events during a trust administration. In many cases, the family home is the trust's most valuable asset and may represent a substantial portion of the beneficiaries' inheritance.
This is especially true in San Diego, where many families purchased their homes decades ago and now own properties worth one million dollars or more.
Before selling trust real estate, trustees should carefully review the trust document, understand their fiduciary duties, communicate appropriately with beneficiaries, and consider the financial and tax implications of the transaction. Trustees should also maintain detailed records throughout the process and seek professional guidance when necessary.
Trustees who are unsure how to proceed should consider obtaining legal guidance early in the Trust Administration process, particularly when real estate is involved.
With proper planning and careful administration, trustees can often complete the sale process efficiently while carrying out the settlor's wishes and minimizing the risk of disputes.
Why Work With Amichai Law for Trust Administration?
Serving as trustee can be overwhelming, especially when the trust includes valuable real estate, multiple beneficiaries, or assets located in different states. If you are looking for guidance, a San Diego Trust Administration Attorney can help trustees understand their duties and navigate the administration process.
Amichai Law assists trustees throughout the trust administration process. We help trustees understand their duties, navigate complex legal issues, communicate with beneficiaries, coordinate real estate transfers, and administer trusts efficiently and professionally.
Whether you are considering selling trust property, evaluating assets left outside the trust, or simply trying to understand your responsibilities as trustee, experienced legal guidance can help reduce stress and avoid costly mistakes.
Need Help Administering a Trust?
Serving as a trustee can be stressful, especially when real estate, multiple beneficiaries, tax issues, or assets outside the trust are involved. Many trustees have never administered a trust before and are unsure whether they are taking the right steps.
If you have questions about selling trust property, handling beneficiary concerns, transferring assets, or administering a California trust after the death of a loved one, Amichai Law can help.
Schedule a Trust Administration Consultation to discuss your situation and learn about your options.
Disclaimer
Trust administration is a complex legal process. No two trust administrations are exactly alike. The duties of a trustee and the appropriate course of action will depend on many factors, including the nature and value of the assets, the location of the assets, the number of beneficiaries, the terms of the trust, and the specific facts of the administration.
Most individuals named as successor trustees have never administered a trust before. As a result, trustees often encounter legal, tax, accounting, and practical issues that require professional guidance.
For this reason, trustees should strongly consider consulting a California trust administration attorney and qualified tax professionals before making significant decisions regarding trust assets or distributions.
This article provides general educational information only and does not constitute legal advice. You should not rely on this article as a substitute for legal advice regarding a specific trust administration. Because every trust administration is different, trustees should obtain advice based on the unique facts and circumstances of their particular situation.