Should our co-op board approve purchases or transfers to trusts?

“Requests to transfer a co-op’s shares to a trust or to buy a co-op with a trust or limited liability company do add another layer of bureaucracy for a co-op—but an increasing number of boards are considering it,” says James Woods, Esq., managing partner at Woods Lonergan PLLC, a Manhattan-based law firm focused on real estate and in particular, cooperative board representation as well as buyers and sellers.

In many cases, shareholders are pushing boards to allow the transfer of shares to a trust for estate planning reasons or because it often entitles the grantor to tax benefits. 

Allowing trusts may also make the co-op more desirable, opening up the buyer pool in the case of trust purchases. Permitting trust transfers can also be a way to raise revenue for the building if the governing documents allow fees to be levied when shares are transferred. 

What are the risks of allowing trust purchases or transfers to a trust?

Trusts have an opaque ownership structure, making it more complicated to go after an individual shareholder if the maintenance or assessments are not paid.

“Without adequate protection, the co-op board can’t turn to the occupant of the apartment in order to address a default and you could have problems with unauthorized occupants in the apartment,” Tobin says. 

Another concern might be the question of which individual associated with the trust has co-op voting rights. If there are multiple beneficiaries or trustees claiming voting rights this could result in confusion during an election. 

What process should our board follow if we decide to allow trust purchases or transfers to a trust?

You will first need to check the governing documents to see what the co-op allows. 

“If a transfer to trust is permitted in the governing documents of the co-op, permitting trust ownership is a good way to accommodate shareholders, but the co-op will want to take protections too,” says Lauren Tobin, Esq., an associate attorney at Woods Lonergan PLLC, specializing in the co-op board, buyer and seller representation.

With the support and oversight of an experienced co-op attorney, the precautions a board takes can prevent some of the headaches that might arise with transfers to trusts and LLCs. 

“As a precondition for this type of transaction, the board will want to have a prospective purchaser or shareholder provide a range of documents to be reviewed by the co-op attorney,” Woods says. In addition, you will want the grantor to commit to paying for the trust review process, which might amount to a few thousand dollars.

One important document is an opinion letter from the attorney who originally drafted the trust. “This document outlines who the grantor is, who the trustees and beneficiaries are, and expresses the opinion that the trust was validly formed and the transfer contemplated is permitted by the trust document,” Tobin says. 

Some trusts are not formed to hold assets like co-op apartments or were created in other jurisdictions, so an opinion letter from the attorney who drafted the trust is an added protection for the co-op.

 “Your co-op attorney will also be an extra set of eyes on the document to make sure the transfer is proper,” she says. 

Additionally, an agreement should also be drafted that clearly identifies the authorized occupants of the apartment. “In the case of a transfer, this is often the grantor or the person who currently owns the shares so there might not even be a need for an interview,” Tobin says. 

However, you will want to establish at the outset that if there is a beneficiary or occupant who is not the current shareholder, they will need to seek board approval. “They would need to be interviewed in exactly the same way as would a traditional co-op purchaser,” Woods says.  

At the closing, you will also want an agreement stating that the occupant personally guarantees the financial obligations under the lease. 

“That would mean any default in the maintenance or assessments would be met by the person living in the apartment,” Woods says. 

So if, in the worst case scenario, you end up in court, you are not only turning to the trust assets for a remedy but also the person living in the apartment who takes on a financial responsibility if there is a default or other liability.

In most trust transfer or trust purchase situations, Woods says his firm will also require an additional agreement requiring that the board receive written notification of any changes to the trust.

“If there are material changes, or changes to the beneficiaries, or trustees, the board would want to approve those changes as they are in effect, transfers,” he says. The board always needs up to date information on who is the responsible party. 

If there are multiple trustees, the board will want to clarify who has voting rights. 

“This is another important detail that needs to be squared away at closing before anything is transferred,” Tobin says. 

Can our co-op board collect a flip tax on trust purchases or transfers to a trust?

One other consideration for a board is whether or not the building can collect a fee or flip tax when a co-op is transferred to a trust. 

“You could have a situation where the occupants change but since the shares are in the name of the trust, the board does not collect a flip tax,” Tobin says. For example, say the occupant passes away or wants to allow another to occupy the apartment, this can be effectuated without any change in ownership. Therefore, the co-op will miss an opportunity to collect a flip tax.

The ability to collect a fee from the transfer of shares to a trust likely will be outlined in the governing documents.  In some cases, the transfer of an apartment in a co-op to a direct family member is permitted by the governing documents without incurring a flip tax regardless of whether a trust is involved.

It’s also possible the board will want to consider an amendment to the bylaws allowing the implementation of fees for trusts in order to generate revenue for the building. If you do adopt this type of policy it would need to be applied uniformly to all shareholders.

James Woods is a partner at Woods Lonergan PLLC, and Lauren K. Tobin is an associate attorney with the firm. Woods Lonergan PLLC  represents New York City cooperative corporations, condominium boards, management companies, buyers, sellers, commercial landlords and tenants. To submit a question for this column, click here. For a free, 15 minute legal consultation, call 212-684-2500 or send an email.

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