I begin this column with a disclaimer.  Although I have called upon my attorney contacts to share their insights and experiences, I do not offer legal advice, but rather bring attention from a broker’s point of view to a current complicated issue.  Buyers and sellers always should consult with their lawyers for legal guidance in all aspects of their real estate transactions.


I am in contract on a Fifth Avenue co-op with a buyer who wishes to hold title in a trust for estate planning purposes.  I represent the seller in this transaction, and it was a competitive bid situation, so I advised the buyer’s broker to remove any contingency and to proceed to contract in the principal’s name and then, after closing, apply to the board for a transfer to a trust.  While it’s not the first time in my 25 years as a Manhattan broker that I’ve been involved with a trust question, it is the first time that I have gotten advance positive feedback from a managing agent that the co-op board would entertain the prospect of trust ownership.  Unlike the knee-jerk negative responses I’ve heard in the past, this managing agent advised that the corporation did not object “in principle” to a transfer by a shareholder to a trust, specifically a “QPRT” or Qualified Personal Residence Trust. 


“While there are a myriad of types of trusts,” explains Frank Julie, an estate planning expert and partner at Joseph and Koppel LLP, “only two are seen as desirable for residential ownership:  the QPRT which is irrevocable and done for very specific estate planning purposes, and the living trust which is revocable and used for non-tax reasons, like providing greater control over assets in the event of a disability.”  


As I see it, there are two primary concerns for the co-op.  First, trust ownership challenges the policy of owner occupancy.  Secondly, since the trust is a legal entity and not a person, there is no one to be held accountable when maintenance is unpaid or when house rules are disregarded.  In order to eliminate these worries, the trust and the co-op usually enter into additional agreements.  Specifically, an Occupancy Agreement would establish who is permitted to reside in the apartment, and provisions would be made that on the death of the approved occupants, the trust would not permit the apartment to be occupied by anyone who is not approved by the Board.  Additionally, the occupants would provide a personal guarantee for all the co-op’s financial obligations.  In some cases, the co-op board may also request a year or more of maintenance payments to be held in escrow.  Sometimes, an ancillary jurisdictional document names a specific agent who can be served in the case of a legal proceeding.


The foregoing is logical and reasonable, especially in a cash transaction when a bank is not involved.  However, when there is financing, other stumbling blocks surface, since the stock and lease must be in the same name as the contract, and lenders are loathe to give co-op loans to non-individuals.  Sometimes when title is changed to a trust, the bank may permit the trust to assume the loan, but more often than not, the borrower must refinance since the bank physically holds the stock and lease, and an exchange must be made to accomplish the transfer by cancelling out the share and issuing a new set of documents.  When a flip tax is levied on a sale, each co-op handles the transfer issue differently:  some do not charge when a transfer is made to a child, spouse or trust and no money is exchanged; other co-ops look to add revenues to their coffers by collecting a flat fee or charging a percentage on the appraised value.   


Yielding to Pressure


While the number of sophisticated boards is growing, many more remain unwilling to consider the complexities involved.  As a consequence, brokers may be reluctant to encourage principals to enter a contract in a trust name, primarily because trust ownership may have a negative effect on board consent.  Additionally, trust instruments are lengthy and complex, so their review adds yet another layer of time and cost to the approval process.  “It is important to remember that even with enlightened boards and lenders, their review processes may take longer, and this should be factored in by the parties,” says Reis Cooper LLP attorney Alan Reis who represents cooperative boards and lenders.  


Existing shareholders currently involved in estate planning are exerting considerable pressure on their co-op boards to transfer shares from individual names to a QPRT.    Scott Konner and Robert Teitelbaum of Konner Teitelbaum & Gallagher, a firm which represents about 40 co-ops, point to a changing environment where more and more co-op boards are allowing ownership of apartments by trusts.  "It is becoming increasingly more common for co-op boards to permit either the transfer of an existing apartment or the purchase of a new apartment to occur in a trust.  This is the direct result of tax and estate planning in our more sophisticated society today."


There are benefits as well as risks involved in acquiring or transferring co-op shares in a trust, and these should be evaluated carefully with tax and legal counsel.  The broker’s role is to facilitate the dialogue that leads to achieving desired goals and a successful transaction.