Trust Transfers in Co-ops: Balancing Estate Planning and Building Interests

The trust transfer trend …

CAN’T BE STOPPED, BUT SCRUTINY IS REQUIRED

A growing number of co-op shareholders want to transfer their units into trusts for estate planning purposes, and these requests require careful consideration of multiple factors to protect both the building’s interests and the shareholders’ estate planning goals.

The primary motivation behind these transfers is straightforward: Shareholders want to spare their family members the burden of navigating surrogate court after their passing. However, for co-op boards, approving such transfers isn’t as simple as rubber-stamping the request. The shift from individual ownership to trust ownership raises several critical concerns that boards must address.

BOARD CONCERNS. First and foremost is the issue of financial security. When an individual shareholder defaults on maintenance payments, the board has clear recourse — they can pursue the shareholder’s personal assets or foreclose on the shares. With a trust, the situation becomes more complex. The apartment might be the trust’s only asset, potentially limiting the board’s options for recovering unpaid maintenance fees beyond foreclosure.

Second is the occupancy issue. With individual ownership, boards know exactly who will be living in the unit. Trust ownership clouds this clarity, making it more difficult for boards to maintain control over who resides in their building. This uncertainty extends to voting rights as well — you’ll need to ensure the trust has a designated individual who can participate in annual meetings and vote the shares to maintain quorum requirements.

Finally, the question of who pays the legal fees to review trust requests often arises. The financial burden of these transfers falls on the requesting shareholder, not the building. Legal fees for reviewing trust documents and preparing additional transfer documentation are typically passed on to the individual seeking the transfer. This includes both current shareholders looking to transfer their units into trusts and new purchasers who want to buy directly into a trust structure.

PROTECTIVE STEPS. As your board considers a trust request, one crucial stipulation to require is that beneficiaries don’t automatically gain the right to occupy the apartment or become shareholders upon the original owner’s passing. Instead, they must go through the same approval process as any new purchaser. This requirement applies whether the beneficiary plans to live in the unit or sell it to a third party.

The situation is different in condominiums. Most condo declarations don’t grant boards the same level of control over trust transfers as co-ops enjoy. While some condo boards attempt to impose similar restrictions, they’re often operating outside their legal authority. However, many trust representatives agree to these conditions anyway, recognizing that condos have other ways to delay closings indefinitely.

SHAREHOLDER CONCERNS. One potential stumbling block for shareholders considering a trust transfer is their existing mortgage. The process requires surrendering the current stock certificate and lease, which means obtaining approval from the lender holding these documents. A new stock certificate will be issued to the trustee on behalf of the trust. There’s also an important consideration regarding tax benefits: units owned by trusts may not qualify for the co-op/condo tax abatement, potentially affecting the financial calculations behind such transfers.

Despite these complexities, the trust transfer trend shows no signs of slowing, particularly in co-ops. While some boards initially resisted these requests, many are now recognizing that with proper legal protections in place, trust transfers can accommodate shareholders’ estate planning needs without compromising the building’s interests.