Estate Planning and Trusts for Co-op Shareholders

For estate planning purposes, shareholders often want to transfer their shares into a trust for the benefit of their family members, but for a long time, co-op boards have tended to bar people from making such transfers. Over the last decade or so, that has changed. The trend has even expanded beyond trusts to include other entities like limited liability companies, family limited partnerships, and closely held corporations, providing shareholders with diverse options for asset management and estate planning. 

Trusts defined. A trust acts as a distinct legal entity, taking ownership of assets and removing them from shareholders. This, firstly, streamlines probate proceedings after the shareholder's death. Since the apartment is owned by the trust, probate in surrogate's court isn't necessary, eliminating delays. Secondly, for shareholders with substantial estates exceeding the federal estate tax threshold of $11 million, transferring expensive assets like apartments into trusts can result in substantial tax savings, as these assets no longer count towards the taxable estate. Taking an expensive apartment out of ownership and putting it in the trust can effectively save the estate half the value of that apartment by not having to pay estate tax on it.

Mitigated risks. In the past, a major concern for boards was the risk of nonpayment by trusts, potentially impacting the co-op's finances. This concern was mitigated by shareholders personally guaranteeing all trust obligations. This means the co-op is no worse off than it was before with the shareholder being the owner. Boards also worried about losing control over occupancy and transferability of apartments under trust ownership. However, these concerns were alleviated through occupancy restrictions and re-transfer restrictions, ensuring that only the shareholder and immediate family live in the apartment and any transfer requires board consent.

A formalized agreement. With the development of the conditional consent agreement in 1986, these arrangements were formalized, providing a framework where shareholders, trusts, and co-op boards agreed on key points, including guaranteeing payments, occupancy restrictions, and transfer limitations. The agreement also states the shareholder will cover all associated fees. This safeguards the co-op's interests without incurring additional costs or risks.  It's a very elegant solution that has taken off over the last 37 years. Trust ownership is now extremely common in all sorts of co-ops throughout the city.

Ensured compliance. Regarding potential risks, such as nonpayment or breach of occupancy rules, co-op boards retain standard recourse under the proprietary lease, including eviction proceedings or suing the shareholder to enforce the guarantee. However, instances of breaches of trust have been rare, indicating the effectiveness of the conditional consent agreement in ensuring compliance.