A land trust can be a simple and effective tool for real estate investors who want to maintain privacy in their investments. With a land trust, you appoint a trustee to hold legal title and manage the property for your benefit or the benefit of a third party.
But what happens when trustees take advantage of their positions of power and start using trust property to benefit themselves? Can a trustee sell trust property to himself or herself?
To answer whether trustees can sell trust properties to themselves, we need to start at the beginning.
A trust is a type of agreement where someone holds the legal title to someone else's property and manages it to benefit another person.
Here are a few standard terms that will help you understand how trusts work:
If you place real estate investments into a land trust, you will sign a trust deed that transfers your property’s legal ownership to the trust. When you establish a land trust, you can specify in the trust document how the trustee should manage the property and how to distribute any income generated by the property to the beneficiaries.
Real estate investors use land trusts for various reasons, but the primary advantage is the ability to protect your privacy. When you purchase real estate through a land trust, your name and the price you paid for the property do not become public records like they do when you buy real estate in your own name. You can also use the anonymity that a land trust can offer to keep your identity confidential when making strategic real estate investments.
The trustee is responsible for holding property title and managing it for the beneficiaries' benefit. (We've also written about the roles of the trustee and beneficiary in case you want to know more). When the trust document includes specific instructions for managing the property or distributing income, the trustee is obligated to follow them. Trustees should ensure that they understand all of the trust instructions and obey them to a "T."
Because of the dependent nature of the relationship between trustees and beneficiaries, trustees have a fiduciary duty to the beneficiaries of any trust they manage. A fiduciary duty is an ethical and legal obligation to act solely for the beneficiary's interests when controlling the trust. The trustee cannot use trust property to primarily benefit themselves or third parties who are not beneficiaries. This responsibility is sometimes called a duty of loyalty.
Because of their fiduciary duties to protect the beneficiaries' interests, trustees cannot self-deal. Self-dealing is when a fiduciary acts in their own best interests in transactions instead of in the beneficiaries' best interests. This means that trustees cannot use trust assets in transactions that serve their own interests more than the trust's interests. The trustee should make decisions to benefit the trust—not to benefit himself or herself.
Some of the most common ways that a trustee can self-deal include:
If a trustee were to sell trust property to himself or herself, there would be a conflict of interest, as the trustee would be both the buyer and the seller of the property. The trustee cannot act in the beneficiaries' best interest by getting the maximum price for the property while also pursuing his or her own interests, which is paying less than fair market value for the property.
Unless the trust document expressly authorizes it, a trustee generally cannot:
When the trustee is also a trust beneficiary, that does not change the trustee's obligations to the other beneficiaries.
So the answer to our original question is an emphatic "NO." A trustee cannot legally sell trust property to himself or herself unless the terms of the trust specifically allow it.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
Ready to know more than your attorney? You'll get over two hours of instruction combined with five ebooks to teach you how to best structure your real estate investments.
Join thousands of real estate investors in all 50 states as they enjoy exclusive content, special promotions, and behind-the-scenes access to me and my guests. No spam, ever. Just great stuff!