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Co-Op Estate Planning in New York City: Two Options and Anticipated Concerns

Guzov's Good Advice

New York City residents know that there are pros and cons to living in a co-op versus a condominium. One area of contrast is in estate planning, or the transfer of property to a beneficiary upon the resident’s death.

Condo owners obtain the rights to the real property and can transfer the title of their property into a trust. As a rule, condo boards have less governing power over the way a condo owner transfers their property upon their death.

For co-op shareholders, however, estate planning comes with hurdles to overcome, in that any risks are the concern of all co-op shareholders. This blog can serve as the start of a discussion about estate planning for co-op shareholders, and a preliminary introduction to two ways to utilize trusts in estate planning that can mitigate some of the complications. 

Why Transfer Your Co-Op to a Trust?

Co-op residents or shareholders can transfer co-op shares into a trust, simplifying estate management while providing tax benefits. In most cases co-op shareholders utilize two types of trusts: Qualified Personal Resident Trusts (QPRTs) or Revocable Living Trusts. For either type, if the shareholder has a mortgage, the shareholder will need to seek approval from the bank before creating the trust.

How do QPRTs Work?   

An advantage to Qualified Personal Resident Trusts (QPRTs) is that estate taxes are calculated at far below market value, but there’s a catch. QPRTs only exist for a specified period of time. Essentially,  the creator of the trust [“grantor”] specifies that term and once it expires, the shares will transfer to the designated beneficiary.

Two scenarios are possible:

  1. If the grantor dies before the term expires, the property in question will be taxed at market value with the rest of the estate.
  2. If the grantor does survive the term of the trust, the shares are transferred to the beneficiary which means that the grantor becomes a subtenant, and the beneficiary becomes the shareholder. At this point, a co-op would be faced with a shareholder that had not been vetted.

To avoid this problem of the second scenario, it is important that the grantor and beneficiary come to an agreement with the co-op board for the grantor to continue to live on the property once the trust term expires.

Terms within an agreement

The co-op board can require grantors to sign a new contract that subjects the grantor to the proprietary lease once they become a beneficiary’s subtenant and the grantor’s own proprietary lease is no longer valid. The contract should include terms guaranteeing payment of maintenance and stipulating that the beneficiary cannot sublet the apartment to a third party. To avoid the risk of the grantor being evicted once the term of the QPRT expires, the grantor and beneficiary can implement a lease agreement at arms-length.

How do Revocable Living Trusts Work?

Revocable living trusts are most commonly used to protect one’s estate in case of disability or death. Unlike a QPRT with its specified term, a revocable living trust will transfer the property held in trust to the beneficiary once the grantor dies. An advantage to a revocable living trust is the maintenance of the grantor’s privacy, as, unlike a will, the property will not be probated and subsequently become public information. The disadvantage is that when the shares are transferred to a trust beneficiary who has no existing relationship with the co-op board, problems may show up as the trust beneficiaries may not meet the Board requirements to live in the apartment pursuant to a proprietary lease.

How Can a Board or Shareholder Mitigate Concerns with QPRTs and Revocable Living Trusts?

Although there are risks to allowing co-op shareholders to transfer their assets into a trust, co-op boards can control the situation by implementing specific terms in a new contract, and since a shareholder must obtain the board’s approval prior to transferring shares into a trust, the board will need to vet and consent to the beneficiary. Therefore, to mitigate issues that might occur at the time of the grantor’s death, it is advisable that the grantor and beneficiary work with the co-op board to address concerns and reach an agreement. The Condominium and Cooperative lawyers at Guzov LLC are often brought in to assist the shareholder or the Board in discussions and guide the property transfer process.  

If you would like to discuss how a co-op trust may impact the board, the shareholder and/or the beneficiary, please contact us to schedule a consultation.

This blog was published on August 22, 2023.

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