Title Standard Spotlight
Articles from The Massachusetts Focus
Newsletter of Stewart Title Guaranty Company, Massachusetts Offices
Spring 2005, Volume 4, Number 2
Title Standard Spotlight
by Ward P. Graham, New England Division Counsel
Based on the number of phone calls we get here in the Stewart Title legal department regarding trustee self-dealing situations, this is a good opportunity to review a Real Estate Bar Association for Massachusetts (REBA) title standard that is extremely helpful in these situations: Title Standard No. 23, Self-Dealing by Trustee (“the Self-Dealing Title Standard”).
I. Legal Backdrop to Trustee Self-Dealing Issues.
A trustee’s first duty is to the trust estate and the beneficiaries and, in that regard, to carry out the terms and purpose of the trust. See, Belknap, Newhall’s Settlement of Estates and Fiduciary Law, 5th Ed., §36:28, Vol. 3 at 134. A trustee should not put himself or herself in a position where he or she can derive a personal gain or advantage, whether directly or indirectly, at the expense of the trust and/or where his or her interests are in competition with or antagonistic to those of the trust and the beneficiaries. This is a general and fundamental rule. Id. On the other hand, if a trustee deals fairly, openly and in good faith, a transaction in which the trustee is personally interested will not necessarily be set aside, but there must be no misrepresentation or concealment of material facts and the beneficiaries must be in a position to understand the nature and effect of the transaction. Id., at 137. Thus, it is not always the case that a benefit to the trustee will invalidate a transaction otherwise allowed under the terms of the trust.
In line with these fundamental principles of fidelity and loyalty to the trust and the beneficiaries, it is also a general rule that a trustee cannot sell or transfer the trust property to himself or herself, whether title is taken in his or her name or some third person for his or her benefit. Belknap, supra, §36:28, at 139. The rule applies equally to private sales or sales at public auction, including a mortgage foreclosure sale. Id. In such a case, the beneficiary(s) may have the transfer set aside and have the property reconveyed by the trustee or the person to whom it was transferred on the trustee’s personal behalf. Id. In other words, a trustee is generally prohibited from “self-dealing.” However, it is certainly possible for the trust instrument to allow for such self-dealing. A provision for self-dealing might look like this:
Any and all of my trustees are hereby authorized to engage in self-dealing, without limitation, and nothing contained in this document shall be construed to the contrary. This authority for self-dealing shall include any and all transactions entered into on behalf of a beneficiary in which the trustee may derive a benefit, either directly or indirectly, tangible or intangible. Any transaction entered into by any or all of my trustees pursuant to this authorization shall be binding on this trust and all the beneficiaries and no person dealing with the trustee need inquire any further into the authority of the trustee nor shall any such person be required to see to the application of any proceeds of any such transaction.
Unfortunately, it is the rare trust that contains such a provision, including trusts intended to give a trustee broad powers in dealing with real estate and family trusts created for the protection of the family homestead. In the latter case, it is quite common that the true owners of the property (typically, Mom and Pop) want to refinance and, even though the trust contains a power to mortgage, as I’m sure you have all seen many times, the lender will not lend to or take a mortgage from a trust or trustees and requires a reconveyance of the property back to Mom and Pop individually.
If Mom and Pop are the trustees, this would be a self-dealing situation. It may also have fiduciary loyalty issues associated with it because the transfer back to Mom and Pop individually is usually without consideration. If Mom and Pop are the settlors and the trust is revocable by them, then the conveyance back to them may be considered a revocation of the trust, especially if the real estate is the only asset, and put title back in them anyway. However, not all real estate title holding trusts provide for revocation by the settlors or trustees.
II. Help from the Self-Dealing Title Standard.
Fortunately, the difficulty of these situations has been mitigated in real estate practice, thanks to Title Standard No. 23.
According to the Self-Dealing Title Standard, “a title based upon a deed (presumably, this would include a mortgage) from a trustee of record to himself free of trusts is not on that account defective if:
(1) the instrument establishing the trust expressly authorizes self-dealing on the part of the trustee; or
(2) a court of competent judgment has rendered a judgment authorizing or ratifying the deed; or
(3) a period of 30 years has elapsed since the recording of the deed and the record does not disclose any adverse claim based thereon; or
(4) the trust does not contain spendthrift provisions and (i) all beneficiaries are legally competent and assent to or ratify the conveyance by the trustee; or (ii) barring a prohibition against self-dealing, the recorded declaration recites that third parties may rely without inquiry.”
It is rare that you have a situation in which criteria (1), (2) or (3) apply. Usually, you will be relying on criterion (4). The good news is that the majority of real estate title holding trusts do not have spendthrift provisions, but some do and a conveyancer or title examiner needs to review the trust to make sure one way or the other. Similarly, it is not unheard of for there to be beneficiaries who are legally incompetent, usually because they are minors. For that reason, even if all the beneficiaries are available, it may not be possible to get a valid beneficiary’s assent to or ratification of the self-dealing transfer. What helps in this situation is that provisions in a trust specifically prohibiting self-dealing are at least as rare as specific authorizations to engage in self-dealing and the vast majority of real estate title holding trusts today contain a third party reliance provision. Accordingly, criterion number (4) of the title standard can usually be satisfied.
When such a transfer is accompanied by the customary Trustee’s Certificate certifying that the trust is in full force and effect and that the trustee has the requisite authority to engage in the transaction, the self-dealing transfer can be passed on without the necessity of an additional beneficiaries’ certificate or consent. Special note should be taken as to a Trustee’s Certificate under G.L.c. 184, §35, discussed in REBA Title Standard No. 68. These are used in situations in which no trust is recorded or there is an indefinite reference situation and the trust cannot be found. In such a case, you cannot apply the Self-Dealing Title Standard because there is no recorded trust document to refer to in order to evaluate the criteria under item (4) of the Standard. However, the good news is that the statute itself provides that such a certificate shall be binding on the trustee and the trust in favor of a person relying in good faith upon it. Therefore, so long as you and your client are relying in good faith upon the section 35 certificate, you and your client should be protected.
1 Thanks go to my colleague Richard Urban who found this language in a trust instrument he was reviewing a while ago and provided it to me as a good example of such a provision. [Back to Text]
2 This is not always the best solution because Mom and Pop usually want to put the property back into the same trust shortly after the mortgage transaction and then, at least technically, the trust no longer exists because it has been revoked. That opens up a Pandora’s box of other issues beyond the scope of this article. [Back to Text]
3 Spendthrift provisions are designed to protect a beneficiary from improvident actions in assigning or encumbering his or her beneficial interest in the trust, particularly to creditors, or from involuntary liens or attachments against the beneficiary’s interest in the trust. Such provisions are recognized in Massachusetts. Eno & Hovey, Massachusetts Real Estate Law, 4th Ed., §15.6. It is well-settled in Massachusetts, however, that a settlor may not create a spendthrift trust for his or her protection against creditors and a creditor of the settlor may reach the maximum amount that the trustee has discretion to pay to or for the settlor. Id. See also, Sylvia v. Johnson, 44 Mass. App. Ct. 483, 691 N.E.2d 608 (1998). A spendthrift provision may be as simple as: “The interest of any beneficiary under this trust shall not be anticipated, transferred, alienated or in any manner assigned or pledged by such beneficiary, or by operation of law or by any other method, and shall not be subject to any legal process, bankruptcy proceedings or the interference or control of creditors or others.” [Back to Text]
4 For a sample of third-party reliance provisions, see Paragraphs 2.2 and 2.3 of the REBA Nominee Trust Form (Form No. 20). [Back to Text]
5 See, e.g., the traditional REBA form of Trustee Certificate (Form 20F) and the Land Court forms of Trustee Certificate (Land Court Guidelines, 5/1/00, at 101 and 103). See also, the “new” form of Trustee’s Certificate pursuant to G.L.c. 184, §35, adopted by REBA as form No. 35. [Back to Text]
6 The form of certificate is, as mentioned above, REBA form No. 35. [Back to Text]