Trusts Gaining Acceptance With Co-op Boards

For a long time, co-op corporations tended to bar shareholders from transferring their shares to trusts, largely out of concern that the trustees would be less invested than an individual-owner in the well-being of the building. But times are changing. 

“Those biases are out the window at this time,” says attorney Anita Rosenbloom, a partner at Stroock & Stroock & Lavan who was host of a recent webcast on estate planning and trust administration sponsored by the New York City Bar Association. Rosenbloom and other attending attorneys discussed how co-op and condo boards are becoming noticeably more comfortable with trust transfers as a growing number of co-op shareholders and condo unit-owners seek to take advantage of the tax and probate benefits they offer. 

“Some buildings still don’t allow trust ownership,” Rosenbloom says. “But we can see it’s much more commonplace.” And not only with regard to transfers. “We are seeing numerous requests for trusts to purchase apartments,” she adds. 

Attorney Peter Massa, a partner at Gallet Dreyer & Berkey, says: “In our firm we have roughly 10 of these transactions going on at any time.” He explains that trusts tend to be the more popular instrument for co-op owners, who have likely watched their investment mushroom in value and view a trust as a way to alleviate the expense and headaches of the probate process. Condos, on the other hand, which can be purchased by investors for use as rental properties and which usually don’t require board approval for trust transfers, lend themselves better to limited liability company (LLC) transfers, a legal entity that also shields the principal(s) from tenant claims. 

Either way, the management and board members must proceed with transfers in a manner that safeguards the co-op corporation or the condo association. “This is a situation where it’s okay for boards to accommodate their shareholders and do this,” says Massa, “but it’s not okay to do this without properly documenting it.” 

Perhaps most important, co-op boards, which possess the power to approve or disapprove transfers, must establish a policy and procedure that can be applied fairly and equally to all shareholders – because once the board approves one transfer, it will be hard to say no to the next request. Such a refusal could lead to a legal challenge. 

“Boards really do have to be consistent, and the more objective reasons [you have], if you are going to reject someone, the better,” says Dale Degenshein, special counsel at Stroock & Stroock & Lavan. As a legal representative for co-ops and condos for more than 25 years, Degenshein has established a routine whenever she receives a transfer application. First, she recommends the board immediately obtain a retainer from the applicant for any legal costs, and she notifies the applicant exactly what will be required. This includes, among other things, a copy of the entire trust agreement (without redactions), an opinion letter by the trust attorney (to validate it), an occupancy agreement, and a personal guaranty from a guarantor “who should present financial assets to the board as if they were applying to purchase the apartment,” she says. 

To avoid unnecessary legal expenses and wasted time, Degenshein also apprises applicants of the types of trusts the board won’t accept. These include Medicaid trusts, asset-protection trusts, and trusts made outside the United States. “Those,” she says, “are absolute no-no’s from the start.”