United States: Some Trusts Are Welcome, Others Less So

Last Updated: February 27 2019
Article by Dale J. Degenshein and Anita S. Rosenbloom

Originally published in Habitat Magazine in February 2019

For many years, co-op and condo boards have been averse to allowing the purchase or transfer of apartments through trusts. Under these financial arrangements, the trustor (or grantor) gives the trustee (an individual or an organization such as a bank or law firm) the right to hold title to property or assets for the benefit of a third party, the beneficiary. As a growing number of co-op shareholders and condo unit-owners have sought to take advantage of tax and probate advantages offered by trusts, the long-standing opposition from boards has begun to fade. 

But some trust arrangements are still frowned upon. One is fractional ownership, when an apartment is split among numerous trustees. Attorney Anita Rosenbloom, a partner at Stroock & Stroock & Lavan, recalls a shareholder who wanted to establish a qualified personal residence trust that would allow her to continue living in the co-op apartment for a term – a common petition. But then, at the end of the term, the shareholder wanted the apartment subdivided into four separate personal residence trusts for four children, giving each a 25 percent ownership stake. "The board did not relish the idea," says Rosenbloom, explaining that boards don't want to deal with multiple owners for one unit and the possibilities for discord that it can engender. 

Attorney Dale Degenshein, special counsel at the same firm, also recommends that management give owners applying for a trust a heads-up regarding flip taxes. In some buildings, the flip tax isn't applicable when the apartment is transferred to a spouse or a trust, while in others it is. "Take a look at it," Degenshein advises. "You could be talking about a lot of money." 

Similarly, condo unit-owners who want to initiate a transfer may not realize that switching to an LLC will make them ineligible for the New York City co-op and condo tax abatement. (Trusts transfers can be eligible if the beneficiary of the trust resides in the apartment.) "That's a big deal that sometimes people don't realize until the end," says attorney Peter Massa, a partner at Gallet Dreyer & Berkey

After Degenshein receives the documents, she reviews them for problems or legal impediments. The co-op has to be able to go after assets of the trust. She also reviews past actions involving the shareholder. For instance, if the shareholder has made an alteration or instituted a leasing agreement to use common space, such as a portion of a roof or hallway, "we make sure those are assigned, along with all the other documents," she says. "You don't want to lose that chain of title." 

Since the stability of co-ops depends on having reliable, responsible, and reasonable shareholders, boards are primarily concerned about two things: who will pay the maintenance, and who will reside in the apartment? To ensure that the maintenance gets paid, boards usually require a personal guarantee from the applicant – "to make sure someone is personally on the hook," says Massa. They also request escrow money – equal to one or two years of maintenance – to alleviate further financial risk. 

In the case of a prospective buyer looking to make an initial co-op purchase as a trust, says Massa, "We suggest that the board also review the financials of the principals, and not just the trust, to ensure that the principals would be accepted as anyone else would, and get guarantees from them."

As for who gets to reside in the apartment – and to make sure that no one starts using it as, say, a short-term hotel – the lawyers require an agreement that limits occupancy, in the case of a co-op, to whoever is board-approved. With condos, the principals are also expected to sign a binding occupancy agreement stating who will be living there. 

Massa and Degenshein are lately seeing more requests for trust transfers from New Yorkers who bought during the co-op conversion boom of the 1980s. "You have a lot of people who didn't spend a ton of money for their apartment initially, but now it's worth $2 million, and they have to figure out what's going to happen to them," says Massa. "So it's a much more popular vehicle right now as the prime co-op population is getting a little older." 

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