Are Trusts to be Trusted?

The Low-Down

What should a board of directors of a cooperative do when a purchaser comes to the board and says, “I want to buy this apartment, but I want to buy it in the name of a trust”? This has started to happen more and more frequently, and I’ve had several situations occur in the last year. There are several kinds of trusts, but typically what you have with a new purchaser is a business management trust where the trustee is somebody who has absolutely no connection with the cooperative, and maybe lives in Los Angeles or Dallas.

The bylaws typically say that the purpose of the cooperative is to provide residences for shareholders. The proprietary lease says in substance that the apartment will be occupied as the residence of the shareholder and members of the shareholder’s family. This helps to create a sense of community. How does a trust fit with that? The answer, is it really doesn’t because the owner of the apartment is not the person who’s residing in it.

The Weigh-In

There are two ways of approaching it. One is to simply say, “We will not permit trusts to purchase an apartment as a first-time buyer” – as opposed to somebody who lives in the building, and wants to transfer the apartment to an estate-planning trust, which is a very different animal from the kind of trust that usually buys an apartment.

The second approach is to say, “OK, let’s look at the situation. Let’s examine what kind of trust this really is. Who is the trustee? Where is the trustee? What kind of assets does this trust have?” Obviously, different buildings have different attitudes, and different needs. How important is it for the shareholder to be a full-time primary resident? Some buildings may not care, and some buildings may care a great deal.

The Outcome

I have seen this happen three times in the last year, and it was interesting because one board flat-out said, “No, we’re not doing this. It’s our building policy.” One board considered it for a while, and after thinking about it, decided, “We are uncomfortable with it, and we’re not going to do it.” The third board looked into it, and concluded that the beneficiary was, in fact, going to actually make the building a primary residence, and at least said she was intending to participate. The board was comfortable in going ahead and allowing it.

The Take-Away

The reason this is important is because it raises issues of community, and what a cooperative is all about. The board has to make a policy decision. Are we going to say no to this and walk away from it because it doesn’t fit the lifestyle of our building, or are we going to dig into it? If we dig into it, what kind of criteria are we going to establish as a baseline for what we will, or will not, allow here? Each board has its own approach, and it has to reach its own conclusions.