IS an executor of a will or administrator of an estate entitled to buy an asset of an estate?
This question was recently considered in the Supreme Court of Victoria. The result would be of surprise to most readers.
Josephine Chomley died in 2010 without a will. Her three adult children, Alistair, Michael and Sally, were appointed as administrators of her estate. The laws of intestacy determined that each child was entitled to an equal share of the estate.
An issue arose with the main asset of the estate, a property at Glenmaggie. Each of the children wanted to buy the property from the estate. They were unable to agree as to how the property should be dealt with.
Alistair brought proceedings in the Supreme Court of Victoria. His brother Michael supported the application.
Alistair sought for the court to make an order that the property be sold by public auction, and that each administrator be able to bid at auction and buy the property. Sally agreed that the property be sold at auction, but opposed the proposed order that the administrators be able to bid.
While to many readers it would appear to be a case of "majority rules", the court did not take this view. It ordered that the property be sold by auction and that none of the administrators were entitled to bid for or buy the property. The starting point is that an executor or administrator cannot buy property from an estate.
This is based on the principle that a trustee cannot profit from his position. The exceptions to the rule are where the court authorises the transaction, where the trust document or will permits the trustee to buy the property, or all beneficiaries consent, provided they are all aged over 18 and have the capacity to agree.
If a trustee self-deals in the estate property, the transaction may be set aside by the court even if the terms of the transaction were clear and generous.
In this case, the court's view was that if an administrator of the estate was able to bid at auction, his involvement in the sale process would be compromised.
As the trustee, he is involved in choosing the estate agent and obliged to choose the best agent for the lowest price.
As a buyer he has an interest in choosing the poorer agent who will attract fewer bidders.
As trustee he is responsible for choosing the reserve price on the advice of an independent valuer. As buyer he would be interested in choosing a valuer who would give the property a lower value and consequently a lower reserve price.
The court held that it did have the power to consent to an executor or administrator buying the property from an estate, but this power could only be exercised in exceptional circumstances.
One example is where there are infant beneficiaries, but a court application is still required and there are onerous requirements to satisfy prior to the court providing consent.
If the deceased wanted for one of her children to be able to purchase the property, this could be achieved by preparing a will authorising the executor to be able to buy property from the estate.
Disclaimer:Readers should seek independent legal advice as this article is for information purposes only. Kevin Finn is a solicitor at Beck Legal, Bendigo.