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trust fundsMar 31, 2013

After reading today's NYTimes article about abatements and how trust fund purchasers may not qualify for them, is there any other potential dangers that could effect qualifying shareholders? Should Board's simply not allow "trusts"?

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Trust Funds - dsi1 Apr 01, 2013

I am not a Lawyer. But I have had to deal with this issue a few times. There are two main types of Trusts: Real Estate Investment Trusts REIT) and Revocable Trusts. If your Coop does not allow subletting this is a problem as the Trust becomes the shareholder and the Occupants are technically sub-lessees. So you have just opened that door. The shares pass directly to the beneficiaries and bypass the Board's approval of the next generation of sub-lessee unless there is a sale. Your relationship is with the Executor or Directors of the Trust who act on behalf of the Trust who is the holder of shares. Your Sub-lessee has usually put all their assets into the trust so there are liquidity issues and tax issues. Your Coop Lawyer will have to cut about 5-6 different documents, depending on the exact wording of the trust, to get around it's provisions in order to protect the Coop and not undermine any P-Lease or bylaw provisions, which can be contested. If you live in a building with very wealthy shareholders, it might be necessary to explore or deal with. A REIT has very different maturation and pass-through provisions than an RT. We have turned them down due to the subletting issues.

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Trusts - Steve Rosenstein Apr 02, 2013

dsi1 - I do not want to sound impertinent, but REITS and Revocable Trusts are two entirely different animals. REITS are investment vehicles generally available to the public and are intended to aggregate investors for the purpose of purchasing entire buildings, communities, and other real property assets. I do not believe they get involved with individual unit ownership. Revocable Trusts, on the other hand, are used by individual unit owners for estate, tax, and asset protection purposes. They are limited to the grantors and beneficiaries of the trust instrument.

Have you ever had to deal with a REIT in relation to individual co-op unit ownership? The REITs I am familiar with own shopping malls, retirement communities, amusement parks, etc.

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trusts - dsi1 Apr 03, 2013

Hi Steve,
As I previously mentioned, but perhaps I was not clear enough, they are very different. I did once receive an exploratory on a REIT by a family group wanting to make an investment trust. It neither made particular sense to me, nor did the maturation characteristics and mechanisms make sense. My bottom line always is - if it is in the best interest of the Coop first, and no one so far, has been able to make a reasonable case as to the Coop benefit over the individual shareholder's desires. No-one really wants to discuss risk, and that is an issue and potential major legal expense that might not turn up for 10-30 years. One problem I have run into is that the Lawyers who create some of these trust vehicles get very creative but know little or nothing about Coop Law, proprietary leases and bylaws and therefore create Trust provisions that run rampant over it all. Compounding this is the additional problem that many of these custom devised Trust provisions are untested in the Courts, having no prior precedence in law established as a guideline for us, or the Courts to go by, and in the event of it being contested have then just made the Coop an unwilling partner at our own expense. I hardly see how that is in the best interest of the Coop.
You still have to get back to the purpose of the Trust being to shelter money/assets so the Trust becomes the shareholder, the would-be shareholder is now a sub-lessee with technically a very different legal relationship profile to the Coop, the issue of sub-leasing, and liquidity issues due to dumping everything into the trust. If our Lawyers have to create all sorts of documents to get around the trust provisions, and hope they hold up in Court if/when there is a challenge, then I think we are walking down the wrong road when it comes to fiduciary responsibility to the Coop. Relatively few units sell into a Trust situation outside of the big money Coops, so find a purchaser that isn't wanting one. Until they become a shareholder, the potential purchaser is technically owed nothing by the Coop, either. I want to deal directly, legally with the shareholder of record being the neighbor, and not the Director of the Trust, or it's Board, which often are not resident but can only cost the Board more time and legal expense.
Dealing with Estates can be difficult enough, especially if they are going to go through probate in a foreign country. (had one of those too!), If there is no mortgage then your only leverage is what? Breach and 'notice to cure' and foreclosure? That's a last case scenario. So, I am obviously not a fan of trusts and Coops, Condo's are very different. Not everyone's personal script, even if financially qualified, is conducive to Coop purchasing, I believe that some are better off with a Condo structure as a better fit for their financial or personal needs.
All that being said, with the rising value of RE in NYC, more and more units will cross the threshold into mega-value land, and somehow trust provision guidelines and Coop Law, leases, and bylaws will need to get better aligned. I suspect that will be on a slow case-by-case basis in the Courts, unless the Bar Association sub-committee gets busy. But, as I stated previously, I am not a Lawyer, just a Board member of a great small Coop.

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Trusts - Steve Rosenstein Apr 05, 2013

Hi dsi - Broad stroke I agree with your position about trusts and LLC's. They create extra layers of confusion and effort on the part of boards who are asked to approve unit ownership by a non-person entity. We have a question on our purchase application about shares being held by other than actual people, and we may request copies of the trust and other enabling documents if we have any questions or concerns.

I spoke to a Trust and Estate attorney I know. She said that when her clients approach a board about transferring shares from personal ownership to a trust, some boards will approve the transfer provided there is a stipulation agreement about who will live in the apartment, who will be responsible (guarantee) for maintenance and assessments in the event of arrears, etc. The cost of drawing up the stipulation is borne by the shareholder, and the co-op is reimbursed attorney and other fees for revisions and reviews by the board attorney. So in actually there is not that much extra effort required on the part of board members. As a hedge against arrears and the eventual foreclosure scenario you described, the board can ask for a year or two or three of maintenance be put into escrow. Then there would be actual skin in the game, even without a mortgage.

In addition, If a trust terminates when the shareholder dies (and most that are set up to own co-op shares do terminate at that time), the provisions of the trust do not trump the prerogatives of the board in approving succession shareholders. There still needs to be the formal approval process, and the board still has the right to reject the proposed new shareholders for any of the usual grounds.

In today's litigious environment, co-op shares are placed in trusts for very legitimate reasons. A board needs to be very careful and very thorough in their review of such entity ownership before approving it, but I these things should be evaluated on a case-by-case basis and not rejected out-of-hand. The balance is tough, though, and often goes unappreciated.

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trusts - dsi1 Apr 06, 2013

I agree generally with your assessment, however a few point should be made. If the Coop has a 'no sublet' in it's bylaws then you are in breach. Not all trusts dissolve upon the death of the shareholder, in fact many don't. This scares me: "we may request copies of the trust and other enabling documents if we have any questions or concerns" - as pretty much all trusts are custom instruments they all need to be reviewed by a knowledgeable Coop Attorney and not a Trust Attorney, as they know little about NY RE Coop Law. You still haven't dealt with the cash and liquidity issues that are required of all other shareholders, and getting around the Trust control of the shares. The provisions of the trust have to be written to 'not trump' the prerogatives of the Coop or you are in a litigious situation. In the end result you also have to ensure that you are maintaining a truly level playing field for all shareholders and not creating a special class of shareholders with special privileges. Many of these trusts include the real estate as opposed to being solely of the RE shares. Any newly 'creative' engineering by the Trust Attorney that hasn't already been vetted by the Court System thru due process is a potential problem for the Coop. Being covered for that legal expense, as opposed to all the legal that enabled the scenario is a separate legal expense issue as well. We have seen some remarkably creative and inventive, unproven trust provisions that upon the advice of Counsel would have a very hard time getting thru the Court system. In the end result, how does this benefit the Coop or the Board who volunteer their time?

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Trusts from a T&E perspective - Steve Rosenstein Apr 07, 2013

Hi dsi - I gave the transcript of our discussion so far to my T&E attorney because we were going beyond my level of expertise. Here are her comments:

First, as to dsi1's comments, in my experience, the two most common types of trusts that seek co-op ownership are Qualified Personal Residence Trusts ("QPRTs") and revocable trusts, with Credit Shelter Trusts, as I will call them, a close second. Perhaps dsi1 meant to refer to a QPRT rather than a REIT? Second, as to your comments, revocable trusts are not particularly useful as to tax or asset protection issues. Revocable trusts are used most often by New Yorkers who 1) believe that avoiding probate will protect their privacy, or 2) anticipate a complicated probate because of foreign or disabled family members, or 3) seek more control in the event of incompetency than a power of attorney can provide. The other 2 types of trusts I mentioned, QPRTs and Credit Shelter Trusts, are irrevocable and are used primarily for the purpose of reducing gift and estate taxes, so they are substantially different from revocable trusts.

Given the recent significant changes to the federal gift and estate tax laws, it is quite possible that many co-op boards will begin to receive fewer applications for ownership by QPRTs and Credit Shelter Trusts. This is because under the new gift and estate tax laws, the percentage of taxpayers who are affected by gift and estate tax has been substantially reduced, and even for those who are affected by such taxes, the new "portability", which allows a surviving spouse to make use of the unused exemption of the first spouse, reduces, to some extent, the need for Credit Shelter Trusts. Of course, as noted by dsi1, the increase in the gift and estate tax exemptions will be somewhat offset by the increase in home values, which will increase the values of many gifts and estates. Nonetheless, it is my hope, even as an estate planner who makes a living drafting trusts, that fewer tri-state area residents will have to plan for the complexities of gift and estate taxes in the future. The estate tax exemptions of $1m or $2m that we had in the past may have worked out well for most Americans, but, as you can imagine, those who live in the tri-state area were disproportionately affected.

The issue of whether or not co-op boards accept trusts as purchasers will always be affected by the status of the real estate market in the local area. In a "seller's market" like we have this year, most co-op boards can avoid selling to trusts while purchasers compete for properties. When the tide turns, however, as it always does, in my opinion, co-op boards should allow the purchase of co-ops by revocable trusts that remain revocable by the grantor for the life of the grantor without the consent of another party. In the vast majority of revocable trusts, the grantor is also the trustee and can pay him or herself from the trust at any time for any reason. With certain basic documentation in place, essentially a standard occupancy agreement signed by the trustee and a guaranty of lease signed by the grantor, the co-op will be in the same situation in relation to the trust as it would be to a natural person. Whether the grantor transfers all of his or her assets to the revocable trust or not will be immaterial to the board, which can collect maintenance and other costs from either the trust or the individual or both. It is true that upon the death of the grantor the assets of the trust, including the co-op, will pass to other persons, but the same is true of individual shareholders when they die. Thus, for the most part, revocable trusts should not present problems for co-op boards.

When it comes to irrevocable trusts, however, such as QPRTs and Credit Shelter Trusts, more time and effort may be involved, and more issues are likely to arise. As dsi1 noted, the trust instrument would need to be carefully reviewed by counsel for the co-op. Since the QPRT can hold only the dwelling, and no other assets, a guaranty from the trust beneficiaries will be crucial, yet the trust beneficiaries will change after a finite term of years. An irrevocable trust may also contain a spendthrift clause which means that creditors of the beneficiaries cannot reach the assets of the trust. In fact, the beneficiaries themselves may not be receiving any distributions from the trust, depending upon its terms. In most situations, arrangements can be made that will provide the co-op with all the protections it needs (and I'm usually on the side of advocating that position), but irrevocable trusts do add an additional layer of complexity that smaller and less high-end buildings may understandably wish to avoid.

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trusts - dsi1 Apr 09, 2013

Hi,
Thank you this is quite informative. The problem with the revocable trusts, as I understood it to be was both the issue of the precipitous demise of the Grantor/Trustee, the inherent conflict with non-sublet bylaws, and the Coop's definitions of liquidity of Shareholder(s). Irrevocable Trusts are a real headache for us. There is also the problem of beneficiaries not seeing things the same way the Grantor did, or the intent/purpose no longer being relevant to them and thereby becoming litigious issues that the Coop would never have encountered on a normal shareholder purchase arrangement. Sometimes a Condo can be the better choice I guess. I greatly appreciate the detailed info, thank-you/dsi1

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Trusts - Burt Apr 01, 2013

It depends on how your building handles giving back the abatement funds. Our building just passes through to the shareholder the abatement amount the city shows in their detail listing. If an apartment is held in a trust, the abatement amount will be reduced and eventually end. The building will not get the abatement and since we simply pass it onto the shareholder, the shareholder is the only one who looses. We don't have too many apartments held in a trust and we expect some of them to revert back to individual ownership.

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