A testamentary trust is established when a testator, the individual who makes a last will and testament, dies and names the trustee in his will. The trustee has a fiduciary duty to all the trust beneficiaries and cannot favor one beneficiary over another. Any decision he makes to sell a house that is part of the estate assets, and take a promissory note in return, has to be done prudently and with the interests of all beneficiaries considered.
A Testamentary Trust
In addition to appointing the trustee, the decedent's will also names the trust beneficiaries and assets used to fund the trust. The distribution of trust assets to the beneficiaries and any specific conditions associated with asset distribution, such as a minimum age requirement, are also addressed in the trust. A trustee's duties are typically specified in the trust and controlled by state law.
Duties of the Trustee
The Uniform Probate Code, followed in 18 states, specifies that a trustee's general duty is to efficiently administer the trust and act prudently. In addition, the Uniform Trust Code specifically authorizes a trustee to "acquire or sell property for cash or on credit, at public or private sale." Depending on the state, the trustee may have the power to sell a house owned by the trust on credit to one of the beneficiaries.
Rights of Beneficiaries
Each beneficiary must be treated fairly by the trustee. The desire of one beneficiary to buy a house which is an asset of the trust and give a promissory note in return may conflict with the other beneficiaries' interests. If the beneficiary buying the house cannot be trusted to make payments, the interest of other beneficiaries may be at jeopardy. If, of course, the testamentary trust has only one beneficiary, conflict with other beneficiaries is not an issue.
There may be a time limitation for winding up the administration of the trust, so selling a house on credit may not be possible within that time constraint. Any time limitation may be established in the trust itself or by state law. Additionally, the trust may call for the liquidation of its assets to pay the beneficiaries and any creditors. There may be a question as to whether selling a house on credit to one of the beneficiaries could be considered liquidation.