Selling Trust Property

27 October, 2022 | Kandice Reilly

When trustees of a family trust decide to sell trust assets, there are a few more hoops to jump through than when it is just an individual selling property. To ensure the transaction goes smoothly, and to protect trustees’ liability, the following steps should be taken.

Do the trustees have the power to sell the property?

The first step trustees must take in considering whether to sell property held by a trust is to check the terms of the trust deed to see if there is a power of sale contained within the trust terms.

All the trustees must agree to sell the property – and properly document the transaction

All trustees must agree to the property being sold (including independent or professional trustees). A trustee resolution should be prepared documenting the decision to sell the property. This must be completed prior to a Sale & Purchase Agreement being signed.

The trust’s lawyer should be instructed to act on the property conveyance and the trust assets register should be updated following settlement of the sale.

Ensure the trust has an IRD number

If the trust does not already have an IRD number the trustees should apply for an IRD number to be able to sell the property.

Check if you need to get a valuation of the property

If the sale is a private transaction (i.e. not through a real estate agent), a registered valuation will be needed. The sale of any land or property should be valued in accordance with section 28 of the Trustee Act.

Check the tax implications

Trustees need to be aware of the “Bright-line Test” for residential property in New Zealand. The test will require income tax to be paid on any gains from the sale of the residential property that is bought and sold within the ‘bright-line’ period, except for the main family home and which can include properties held in trust (subject to certain qualifications).

Originally the time period related to property sold within two years of purchase, the time period was extended to five years in March 2018. In March 2021 the Government further extended the time period so that any property purchased on or after 27 March 2021 and then on-sold within ten years of purchase will be subject to the bright-line test.

It would be prudent to seek specialist tax advice if necessary.

Trustees should understand their legal obligations

Trustees would be liable in damages for breach of their duty of diligence and prudence if they were to sell a trust property for an excessively low price. However, the amount of the trustee’s liability is limited to the loss incurred as a result of the breach of trust and this will be the amount of damages awarded.

Ensure the Sale & Purchase Agreement is filled in correctly

As a trust is not a legal entity the vendor’s name is not the trust name but rather the names of the individual trustees, as trustees of the ABC Family Trust. The names of all trustees (as trustees of the ABC family trust) should appear on the vendor section of the Agreement for Sale & Purchase

Distributing the sale proceeds correctly

The trustees need to remember that the proceeds of the sale remain as trust funds, not funds of the settlor(s). Any distributions to beneficiaries need to be dealt with accordingly.

Selling property held by a family trust does not need to be complicated, but the correct steps do need to be followed. If you wish to sell property held by a family trust and want to ensure everything is done correctly, contact property law specialist, Kandice Reilly by email at kandice.reilly@smithpartners.co.nz or by phone on 09 837 6884