Being a trustee is a big responsibility. Many people have agreed to be trustees for friends or relatives but have no idea just what duties and potential liabilities they have taken on. There are many legal duties placed on trustees and when it comes to buying or selling property in a trust, a trustee must carry out certain duties to ensure they are acting in the best interests of beneficiaries.  

The case study below highlights what a trustee must consider when buying or selling trust property.

 A Case Study – Joe and Mary’s Family Trust

Joe and Mary set up a family trust. They appoint an independent professional trustee company (a Statutory Trustee) as a trustee of their trust. They decide to transfer their family home into the trust, along with a rental property which they have had for some time.

Sometime later, Joe and Mary decide that the two properties in the trust need to be sold.

The family home is to be sold in order to enable Joe and Mary to downsize.

The rental property is to be sold as it is no longer generating the returns that it had been.

Because the trustee is a legal owner of both properties, it is important to involve the trustee in the planned sale. Joe and Mary approach the trustee with the plan.

The first thing the trustee will want to know is what the various needs of the beneficiaries are and how the sale of the two properties would affect those beneficiaries.

In this example, the beneficiaries are Joe and Mary as primary beneficiaries and their children as secondary beneficiaries and final beneficiaries. Each of their children have moved out of home and are making their own way in life. The trustee is satisfied that selling the family home will not be detrimental to the beneficiaries and, while the rental property has been a good investment so far, its sale will free up some capital and allow for a more diverse investment portfolio to be put in place, which will better match the needs of the beneficiaries.

Having determined that the sale of the two properties would benefit the various beneficiaries, the trustee then turns to the practical considerations of the sale.

Brightline Test

The first of those considerations is in relation to the Brightline test.

Under current law, if anyone (including any trust) has purchased a residential property on or after 29 March 2018 and has owned that property for less than five years, that person (or trust) may be facing a tax bill for any capital gain made on the property during the period of ownership.  

However, for property owned for less than five years, there may be an exemption that will allow the owner to sell the property without paying tax on any capital gains. When looked at from a trust perspective, the trustee will assess whether the “main home exemption” may apply. The main home exemption is where a beneficiary of the trust has been living in the property as their main home for the majority of the time the trust has owned the property, and the Principal Settlor (being the person who has settled the most assets on the trust) does not have another property as their main home.

Here, Joe and Mary are the principal settlors. They have been living in the family home as their principal residence and have no other property which could be termed their “main home”. Therefore, if that property is caught by the Brightline test (being that the trust has not owned the property long enough to avoid the tax bill at the point of sale), the family home would be exempted from any tax that resulted from being caught by the Brightline test.

But what happens with the rental property? If this property was caught by the Brightline test (being because the trust had not owned the property long enough to avoid being caught by the test), the trust would not be able to claim exemptions that would prevent it having to pay tax on capital gains. The reasons are:

• It is used for a rental property, not as the main residence of one of the beneficiaries; and
• Even if one of the beneficiaries was using the property as their main home, the principal settlors – Mary and Joe have another property (the family home) as their main home. The main home exemption is only able to be used once – and in a trust scenario, the main home is always linked to the principal settlor (being the person or persons who have settled the most assets on the trust). If the principal settlor has another property which is their main home (and it does not matter whether that main home is inside or outside of the trust), the main home exemption cannot be used for another property. In this instance, the rental property would miss out on any possibility of using the main home exemption as Mary and Joe have another property which is their main home.

Valuation

Mary and Joe have arranged for a friendly real estate agent to come through, and they have also discussed the scenarios with friends and have worked out from that what they think each place is worth. They have advised the trustee as to the proposed sale price.

As a Statutory Trustee, the trustee is under a duty to exercise the care and skill that is appropriate for an entity which is acting as trustee in the course of a business or profession. As such, the trustee is under a duty to carry out due diligence and ensure that it is making the best decision for the beneficiaries of the trust. The trustee in its role as trustee of Mary and Joe’s trust is the owner of the properties. Therefore, it is up to the trustee to carry out its own due diligence and investigation into what the value of the property may be.  While it may be appropriate under some circumstances to go with the advice of a real estate agent, if there is any doubt, or any contention tied up with the sale of the two properties, the trustee would go down the path of obtaining a registered valuation. Valuing property can be a very subjective area. One can have two very different valuations provided by two people working within the same industry. And with such variation in price, the trustee needs to be certain that the price which each property is listed for sale at, is appropriate. Therefore, the best option may be to obtain a registered valuation.

There are two kinds of valuations – a desktop valuation, where a valuer makes a determination without leaving their desk – and an on-site valuation where the valuer actually goes out to the property in order to view it in person. A desktop valuation may be appropriate where a property is a freehold property and has not had any major renovations done to it. However, if the property is not a freehold property, or has had major renovations or extensions done to it, then an on-site valuation would likely be more appropriate.

An on-site valuation is particularly useful in the context of a fluctuating  property market, in circumstances where the property is in particularly good (or bad) state of repair for a property of its age and type,  or where there is any uncertainty around the value of a property at the point of sale.

Returning to our example, the rental property held in trust is a cross lease. When dealing with a cross-lease property, a lawyer (and often a real estate agent) will be able to review the record of title for the cross lease and compare the flats plan with what has actually been built on the property. If an addition has been made to the property (such as a conservatory) but has not been recorded on the flats plan, then this alerts the trustee to the fact that the cost of rectifying that flats plan to accurately record the footprint of the cross-lease home. A valuer would be able to tell us whether any problems with the title should be reflected in the price which is settled on for the sale of the property. This may inform the strategy for the sale.

The Sale

Once all above decisions have been made, the trustee then takes on more of a liaison role, working with the real estate agent, the beneficiaries who may be living in the property and the solicitors involved in the transaction in order to ensure the smoothest possible sale takes place.

It is helpful for a trustee to have as much notice as possible of an impending sale to enable the trustee to provide professional input and to avoid ay last minute stress.

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