With Married Couples, It's Complicated

There are many details that can trip you up in a co-op apartment sale, especially when shares are owned by a married couple. Let’s start by clarifying why buying a co-op apartment is not like buying a condo apartment. 

You’re not actually buying real estate or a physical space, because there’s no deed to the unit. What you’re purchasing is shares in the corporation, and tied to those shares is the proprietary lease, which allows you to live in the unit and makes the unit itself your responsibility. So when you purchase the shares from the seller, the co-op would issue the shares in the names of the owners, whether it’s one person, two or three.

So if a married couple buys a co-op apartment today, how are the shares designated?

Pursuant to the New York State estate planning trust law, if a married couple buys shares today, they’re automatically designated as what’s called joint tenancy. That means a tenancy-by-the-entirety; if one of the shareholders of the married couple passes away, the surviving spouse owns 100% of the shares. But that wasn’t always the case. This section of law was amended as of Jan. 1, 1996. If you purchased the shares prior to 1996, the default ownership under the law was tenants-in-common under the law.

Let’s say a married couple bought an apartment prior to 1996, the husband dies, and the unit needs to be sold. What problems can crop up?

If there is not a designation on the shares of tenancy-by-the-entirety or a designation of joint tenants with right of survivorship, the couple owns the shares as tenants-in-common, which means each partner owns 50%. So if the husband passed away his estate would own that 50% interest in the shares. Most of the time all the assets flow directly to the spouse. However, if there’s not an estate formed through the court, there’s no legal entity to act on behalf of that person’s estate. That can crop up at the time of closing, and you have to adjourn the closing because there’s no legal representative for the decedent’s 50% interest in the property. 

What if there’s a will saying the husband’s shares will pass to the spouse?

That will has to be probated and go to the Surrogate’s Court, which reviews the will and then issues letters testamentary, which basically says they reviewed the will. The court grants the executor the ability to act on behalf of the estate, and the executor has the ability to transfer the decedent’s 50% interest. That’s obviously something you want to resolve prior to closing. 

So the best practice for couple transactions to go smoothly is to have the seller’s attorney, the transfer agent or the attorney for the co-op review the shares prior to a closing being scheduled. If a designation of either joint tenancy with rider survivorship or tenancy-by-the-entirety is written on the shares, all of them pass to the surviving spouse. But again, if nothing is written there we default to what the law says, and the law says that means it’s tenants-in-common. So what we’d want to do is direct the surviving spouse to start the process of forming the estate in Surrogate’s Court so that he or she will then have the ability to act on behalf of the deceased partner and get the shares.

How long does this process take?

In normal times, if it’s a will and it’s uncontested, it should only be a matter of weeks. But in the current environment where the courts are pretty backed up, it can take a lot longer than that. If there was no will in place, you have to do what’s called an administrative proceeding. That takes longer because you have to try to identify who the potential beneficiaries are and notify them of the proceeding. So I advise clients and boards to always advise shareholders that they should have a will. 

For married couples who bought their apartment before 1996, what should they do today in anticipation of the apartment being sold in the future?

If you bought it a long time ago, hopefully you’re fortunate enough to have either bought it in all cash or paid off your mortgage and are at the point where you now retain the original shares. You want to see if there’s a designation on them, and if there isn’t, you want to contact either your board or your managing agent and go through the process of putting a designation on the shares. The board and the managing agent don’t have to issue you new shares. They just have to put in the new designation you want, recognize the designation has taken place and make a copy of the corrected shares to keep in their books and records. 

So you don’t have to go to court to get this done.

If you’re both alive, we can get the designation changed. If one of the partners has passed away, you’re going to want to preemptively go to court and get the estate forms, because it’s not just the shares. You might have bank accounts, safety-deposit boxes and things like that you’re not necessarily going to be able to access without the court designating you as the representative of the estate. So you want to try to do that before you’re ready to close on the apartment.

What if the owners still have a mortgage? Isn’t the bank holding the shares?

Yes. If that’s the case, you’re going to have to contact the board and the manager and find out the process to designate the shares. And then you’re going to have to contact the bank, because the bank has to come and bring your shares to the closing to get the designation changed. You do that by filling out an affidavit stating that the shares are being held a certain way. And we then can annex that to the books and records of the corporation.

At how many closings does this problem of incorrect share designation come up? 

Well, I wouldn’t say incorrect, because it’s just how they were done. But the short answer is you would hope it’s zero, because you want to make sure the seller’s attorney is doing his or her job at the beginning and is going to ask to see the client’s shares. We’re the transfer agent for almost all of our buildings, and the way we work is to ask to see the stock certificate prior to the closing so we can review it and see if it’s from before 1996. If there are any issues, we would get things rectified prior to even scheduling the closing. So again, it should be zero, but the problem happens a lot more often than you’d think.