Executors often want to buy assets belonging to an estate. Beneficiaries often suspect the executors of wrong doing. So I often am asked whether it’s legal for an executor to buy an asset from the estate. The short answer is maybe, possibly, but not usually.
To demonstrate the problem let’s imagine that Ben just died. He and his brother Harry owned an apartment building. These brothers loved and trusted one another their whole lives. Ben never married and treated Harry’s wife like his own sister and Harry’s kids like his own children. Ben was appointed as the executor and estate trustee for his late brother’s estate. The beneficiaries of the estate are the deceased’s wife and two children. The only asset of the estate is 50% of the apartment building.
Ben gets two independent appraisals valuing the apartment building at $2 million. He offers the estate $1.5 million dollars for its ½ of the apartment building. Each of the beneficiaries gets independent legal advice approving the sale. So what do you think? Under these circumstances can Ben buy the estate asset even though he is the executor and estate trustee? Would you change your opinion if immediately thereafter Ben gets a call and someone offers to buy the apartment building for $4 million?
The general rule of thumb, as articulated by Professor Waters in his book Waters Law of trusts is that “It is a fundamental principle of every developed legal system that one who undertakes a task on behalf of another must act exclusively for the benefit of the other, putting his own interests completely aside. In the common law system this duty may be enforceable by way of an action by the principal upon the contract of agency, but the modes in which the rule can be breached are myriad, many of them in situations other than contract and therefore beyond the control of the law of contract. It was, in part, to meet such situations that Equity fashioned the rule that no one may allow his duty to conflict with his interest”.
Estate Trustees/Executors are considered fiduciaries. The common law is very clear that as fiduciaries have an exclusive duty of loyalty to the beneficiaries. If so, a court will wonder how could Ben negotiate a deal fairly when he represents the buyer (himself) and the seller (the estate)? That is why at common law, the fiduciary is absolutely forbidden from dealing with estate property for his own benefit regardless of how honest or fair the purchase may be. Nonetheless, despite that general rule of thumb, the courts have not always been consistent in how they apply this rule. While there is a consensus that the executor must act in a way that is in the best interests of the estate the courts differ on how strictly to apply the rule.
Some court decisions suggest that Ben could not buy the estate’s interest in the apartment building because even if he was being honest and even if he meant well he cannot possibly give the exclusive loyalty to the beneficiaries when he himself stands to make a profit. Those cases would suggest any such purchase is a breach of fiduciary duty and the deal can later be set aside even if the purchase was reasonable and the beneficiaries were not harmed. For a review of those cases I refer you to CED Trusts VI.4.(c).(ii) and WatersTrusts 18.II.
Other courts have considered the Fiduciary’s duty of loyalty as being intended to prevent actual harm to the beneficiaries. If there is no harm then these cases suggest there may be some flexibility that would permit the purchase. If Ben could show that the sale caused no harm to the beneficiaries and that his actions were reasonable his purchase may be allowed. For example, Ben might argue that he paid over market value because the apartment was worth more to him because he already owned ½ . Ben might say that the beneficiaries would not have gotten a price as high from anyone else. However, a disgruntled beneficiary might suggest that Ben did not disclose that he had an offer for $4 million dollars for the apartment.
While at common law, the fiduciary is absolutely forbidden from dealing with estate property for his own benefit regardless of his honesty and fairness of the purchase, there are infrequent circumstances that courts have allowed fiduciaries to buy trust property. Examples include Re Nathanson (1971), 18 D.L.R. (3de) 495 (N.S.T.D.) and Mochan v. Omega Oil & Gas Ltd,  1 S.C.R. 348 (S.C.C.). In these cases the courts approved of sales to a fiduciary. In one instance the trustee showed he unsuccessfully tried to find a buyer and the sale was in the best interests of the estate. In the other it was clear the price was fair and those to whom the fiduciary duty was owed consented to the sale with full knowledge.
Fiduciaries who wish to purchase trust property are well advised to make 100% full disclosure to beneficiaries and obtain their consent to the sale of trust property to the trustee. As well, it would be prudent to for all the beneficiaries to obtain independent legal advice. Furthermore, the purchase price should be somewhat more then fair market value. With all these arrows in his/her quiver the trustee might be well advised to seek preapproval of the sale from the court by bringing an application for the opinion, advice and direction of the court under Rule 14.05(3)(d), and under section 60 of the Trustee Act, R.S.O. 1990, c. T.23. It may happen that a judge will decline to hear the application because they might believe that preapproval of a sale is not the advice or opinion contemplated by the legislation. A judge might point out that if this offer to purchase came from a arms length third party no application for directions would have been made. One senior counsel suggested to me that there are other legal paths which might be a better option. But that – is for another time and another blog. The bottom line is that anyone faced with this issue, whether he/she be a trustee or a beneficiary, should not treat this blog as legal advice and is best advised to seek out a competent experienced lawyer to guide them.