Geoffrey Mazel, Hankin & Mazel

Hankin & Mazel, Partner

Geoffrey Mazel

The client’s take. The shareholder was doing some long-term family and estate planning. He loved his apartment, his kids loved the apartment, and he wanted his kids to inherit the apartment. To that end, he wanted to change ownership from “individual” to a family trust. By creating a trust, the apartment is owned by an entity and no longer an individual.

The legal issue in this case involves the issuance of shares and proprietary leases of the co-op corporation in the name of a trust. What are the issues the board needs to consider, and what is the exposure of the co-op corporation? Should the board allow a shareholder to, in effect, modify an age-old adage to read, “In trusts we trust”? The answer is not clear, and a board of directors must be very careful to avoid the pitfalls of allowing trust ownership in its co-op. Let’s look at this issue in more detail.

Most common form proprietary leases require the co-op unit to be used as a private dwelling to be occupied by the shareholder and family – spouses, children, partners, etc. The issue regarding a trust ownership is that a trust is not a person and cannot physically occupy a unit. A trust is the result of an agreement between an appointed fiduciary, known as a trustee, and a beneficiary, who is the existing shareholder. The purpose of the trust agreement is usually for estate-planning purposes. The most common reasons are to avoid Medicare liens, estate taxes, and probate.

Essentially, if the shares and proprietary lease are transferred to a trust, there is a technical violation of the occupancy provision of the proprietary lease, and this transfer serves no corporate purpose. Further, there have been countless cases where the trustee has allowed people other than the beneficiary to occupy the unit, creating serious issues in the co-op. In addition, trustees may be hard to locate, fail to pay the maintenance, and create problems that would not exist if the shares were never transferred to this trust.

The lawyer’s take. If your board allows this type of transfer, there are several ways to protect the co-op and the remaining shareholders. First, you need to have your attorney review the trust agreement and make sure the trustee has the authority to own the co-op unit. As a further measure of protection, many co-op attorneys request an opinion letter from the estate attorney indicating that the trustee has the powers necessary to own and manage the co-op unit.

The transfer should take place in a formal setting with the assistance of the attorney. A lien search must be performed before the transfer can take place. At the time of the transfer, the trustee and the outgoing shareholder must be required to sign an agreement that clearly states the following items:

1. The outgoing shareholders shall remain the only occupants of the unit.

2. The outgoing shareholder guarantees the maintenance payments.

3. No other persons may occupy the unit.

4. The outgoing shareholder accepts service of process.

Case closed. If a co-op board provides the necessary protections and has the appropriate agreements in place, trust ownership can provide a substantial benefit to a co-op’s shareholders, with little or no exposure to the co-op corporation.