📄 Mass. Real Estate Law: How to Avoid Trustee Self-Dealing

Trusts often cause more legal problems than they avoid. This is especially true when real estate is transferred into or out of a trust. One of the most common problems arises from a trustee’s “self dealing” which can occur when a homeowner puts his real estate into a trust and then transfers it back to himself for nominal consideration.

Here’s an example. A homeowner goes to an attorney to have an estate plan drafted. As part of this plan, the attorney has the homeowner transfer his real estate into a trust with the homeowner acting as trustee. The lawyer usually says that the trust will help the homeowner’s heirs avoid probate or inheritance taxes or maybe the trust will help the homeowner qualify for MassHealth assistance with nursing home bills. Whatever the reason may be, the credulous homeowner listens to the attorney and gives legal ownership of his home to the trust. A few years later the homeowner wants to refinance his home. The bank refuses to lend to the trust and therefore the homeowner must transfer his home back into his name. This transfer is usually done for “nominal consideration”, in other words for no money or just $1.

In many cases, such a transfer is defective because it breaches a trustee’s fiduciary duty not to “self deal” with trust property. The beneficiaries of the trust could, in theory, invalidate the transfer and have the property put back into the trust. (The fact that the trustee is often the sole beneficiary of the trust is irrelevant.)

To avoid “self dealing”, one of four things must happen:

1. the trust must expressly authorize the trustee to engage in self dealing or
2. a court of competent jurisdiction most authorize or ratify the transfer or
3. a period of 30 years must lapse from the time the defective deed was recorded without any challenges being made against the transfer or
4. the trust must not contain spendthrift provisions and (i) all beneficiaries must assent to or ratify the transfer or (ii) barring a prohibition against self-dealing, the recorded trust must state that third parties may rely on the trustee’s actions without iniquity.

To record such a deed in Land Court a certificate must be signed by at least one of the trustees certifying that all the beneficiaries have assented to the conveyance.

For more information see REBA Title Standard No. 23 and Massachusetts Land Court Guideline No. 53.

If you need legal help, please contact me at justin@jrmccarthy.com