Can Your Child, as Trustee, Buy the Family Home From Your Trust?
Many parents name one of their children as the successor trustee of their living trust. That child is often the one who lives closest, handles the paperwork and knows the family's wishes. Just as often, someone in that trustee's family would like to keep the family home. Those goals can collide, and the time to sort it out is when the trust is written, not after a parent has died.
A hypothetical
Picture an Oak Park widow who names her brother as trustee for her two daughters. After her death, the brother's son offers to buy her two-flat from the trust. The brother is not buying it himself, and the price may be perfectly fair. Even so, the sale can be challenged, and the daughters may not be comfortable with their uncle selling to his own son.
Why a trustee's family purchase is a problem
A trustee manages the trust for the beneficiaries, not for themselves. When the trustee or a close relative is the buyer, the trustee's loyalties are split. As trustee they should want the highest price for the trust. As a parent, sibling or spouse of the buyer, they may want the opposite. Even when everyone in the family gets along, the law treats that setup with suspicion.
What Illinois law says
The Illinois Trust Code addresses this in Section 802 (760 ILCS 3/802). Under that section, an affected beneficiary can generally undo a trustee's purchase of trust property for the trustee's own account. If it is undone, the trustee must return any profit.
Section 802 also presumes a conflict when the other party is the trustee's spouse, descendants, siblings or parents (or their spouses). The same goes for a business the trustee has a stake in that could sway the trustee's judgment. In the two-flat example, the buyer is the trustee's son, so the sale is presumed to involve a conflict.
The statute lists exceptions. Among them:
the trust document, or other applicable law, authorizes the transaction;
a court approves it, or the parties approve it through a nonjudicial settlement agreement (Section 111);
the beneficiary consents to it, ratifies it afterward or releases the trustee (Section 1009); or
the beneficiary does not bring a claim within the time allowed under Section 1005.
If the widow's trust says nothing about family purchases, her brother would typically want court approval, a nonjudicial settlement agreement or the daughters' consent before closing. Consent counts only if it meets the conditions in Section 1009 of the Illinois Trust Code. Each route takes time and money, and it comes at a hard moment for the family.
How to plan for it in your trust
If you expect a family member to serve as trustee, and you are comfortable with family purchases of trust property, your trust can address it directly. Common approaches include:
Leave the home to a specific person. The trust can distribute the house directly to the child who wants it and balance the other shares from other assets, if there are enough.
Grant an option to buy. The trust can give a named person the right to purchase the home at an appraised value within a set period.
Authorize family purchases. The trust can expressly allow the trustee, or the trustee's relatives, to buy trust property at an appraised, fair market price. Such provisions typically require that the terms be fair to the trust.
Act during your lifetime. In some families a lifetime sale or gift of the home makes sense, though it raises income tax and fairness questions worth reviewing first.
However, if the house is most of the estate, an option or a lifetime sale may work better than equalizing shares. Each choice may also carry different tax results.
Review your trust if a family member is your trustee
Some trusts are silent on this point. If you have named a family member as trustee and someone close to them may want the house, review your documents now. A short provision can let your trustee handle a family purchase without a court filing.
Lufrano Law, LLC prepares revocable living trusts, pour-over wills and powers of attorney for Illinois families. Call 800-627-2179 to schedule a consultation.
ATTORNEY ADVERTISING. Lufrano Law, LLC, 818 Harrison Street, Ste. 210, Oak Park, IL 60304. This content is provided for general informational purposes only and does not constitute legal advice.
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