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Client Alert: Beneficiaries of Nominee Trusts Own Interests in Real Estate, Not Personal Property

Beneficiaries of Nominee Trusts Own Interests in Real Estate, Not Personal Property

Goodwill Enterprises, Inc. v. Cathleen E. Kavanagh, Trustee, & Another, August 2019
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The Massachusetts Appeals Court held that a beneficiary’s fifty percent interest in a nominee trust was an interest in real property and not personal property. As a result, when the beneficiary’s interest was sold by a Chapter 7 bankruptcy trustee, the sale triggered the right of first refusal in the lease between the nominee trust that held legal title to the property and its tenant.

Historically, nominee trusts have been used for convenience and privacy. Although the nominee trust and its trustees are identified in the deed by which they take title to a parcel of real estate, the beneficiaries of the nominee trust are typically not disclosed in the deed or the declaration of trust. Nominee trusts are also frequently used in Massachusetts to consolidate and simplify the management of real estate where there are several co-owners, as a probate avoidance technique, and to facilitate gifts of fractional beneficial interests in real estate.

In Goodwill Enterprises, Inc. v. Cathleen E. Kavanagh, Trustee, & Another, Goodwill Enterprises, Inc. (“Goodwill”) sued to enforce a right of first refusal in its lease with the 218 Andover Street Peabody Realty Trust (“Peabody Realty Trust”), a nominee trust. The lease provided that Goodwill had a right of first refusal in the event of sale of the “[p]roperty, or any part thereof.”

William Garland and Daniel Corbett each owned a fifty percent beneficial interest in the Peabody Realty Trust, and Garland was the trustee of the nominee trust. In 2011, Corbett filed a Chapter 7 bankruptcy petition, at which point his beneficial interest in the Peabody Realty Trust became part of the bankruptcy estate. The bankruptcy trustee, without complying with the specific requirements set forth in the lease regarding notice of sale, sold Corbett’s fifty percent beneficial interest to co-defendant, Cathleen E. Kavanagh, as trustee of the April Realty Trust.

After Goodwill learned of the sale, they filed an action in the Land Court seeking enforcement of their right of first refusal. The Land Court ruled that Goodwill’s right of first refusal was enforceable and Kavanagh appealed to the Appeals Court. 

The Appeals Court opinion discussed whether Corbett’s beneficial interest in the nominee trust was properly classified as an interest in personal property or in real property.  Defendants argued that Corbett’s beneficial interest was a personal property interest, and thus no notice was required under the lease while Goodwill maintained that the beneficial interest was in real property.   

The Appeals Court explained that nominee trusts are “bare title-holding” entities created for the purpose of holding title to real property and that a nominee trust creates an agency relationship between the principal (the beneficiary) and the agent (the trustee) of the nominee trust. Unlike other trusts, the trustees of nominee trusts have no power to act over the trust property, except as specifically directed by the beneficiaries. 

The Court noted that because of the unique structure of nominee trusts, Massachusetts law has treated the beneficiaries of nominee trusts as the true owners of the trust’s real property. For example, in the liability context, a trustee of a nominee trust could not be held liable for lead poisoning on the property. Also, for income tax purposes, a beneficiary of a nominee trust could deduct on his personal tax return losses he incurred in connection with the real property owned by the nominee trust. The Court held that, “[a]s a matter of law, the trustee acted as their agent, and ultimate control and authority resided at all times with the beneficiaries.”

Although Corbett only held a fifty percent beneficial interest in the nominee trust, and thus could only veto (not initiate) actions taken by the trustee, “Corbett owned and exercised control over the real estate to the extent of his fifty percent undivided share in the real estate…,” just as he would if he owned the property as a tenant-in-common. Further, the bankruptcy sale did not fall within the short list of exceptions to the right of first refusal set forth in the lease.  Therefore, Corbett’s beneficial interest in the Peabody Realty Trust constituted a real property interest and the lease’s right of first refusal was triggered when the bankruptcy trustee accepted the bid for the sale of the interest in the nominee trust.

For more information, please contact Casner & Edwards' Trusts & Estates Group.

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