Can a Beneficiary Buy a House From a Testamentary Trust & Give the Trust a Promissory Note?

By Timothy Mucciante

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 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.

Divorce is never easy, but we can help. Learn More

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.

Other Considerations

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.

Divorce is never easy, but we can help. Learn More
How Do You Remove the Executor of a Living Trust?

References

Related articles

What Is the Power of a Trustee in a Testamentary Trust?

In a testamentary trust, the trustee's function is to serve as guardian and manager of trust assets. The trust document will often describe specific powers granted to a trustee, but those powers may also be affected by state law.

What Happens When a Trust No Longer Has Assets?

Trusts must adhere to specific requirements to be valid. All trusts, including living trusts and irrevocable trusts, must have trust assets, i.e. property, a trustee and beneficiaries. In general, when a trust runs out of assets, the purpose of the trust is considered fulfilled and the trust may be terminated. Depending on the circumstances, the trust may need to be officially dissolved by obtaining court approval.

Duties of a Trust Administrator

A trust administrator takes care of trust assets for the benefit of the beneficiaries. The trust administrator may be either an individual or an organization such as a bank or specialist trust company. The trust deed sets out the specific duties of the trust administrator. In addition, the law imposes certain more general duties on anyone who administers a trust. If he fails to comply with his legal duties, the trust administrator could potentially become personally liable for any losses.

Get Divorced Online

Related articles

A Revocable Trust & Asset Protection

Living trusts are estate planning tools used for transferring property at death. These trusts go into effect during ...

What if My House Is Not Paid for: Can I Put It in My Living Trust?

A living trust is an estate planning tool that acts as a holding area for property. A grantor -- the legal term for a ...

Can a Trustee Be Removed for Not Giving a Accounting?

A trust involves the holding of property for the benefit of another. The relationship is legal in nature; the person ...

Can an Heir Be a Co-Trustee of the Trust?

An heir can be named as a trustee, even if he is a beneficiary. However, there are issues to consider when naming an ...

Browse by category
Ready to Begin? GET STARTED