A Matter of Trust
For estate planning and privacy reasons, it often makes sense to hold the shares of a co-op or to take title to a condo in the name of the trust. Since most condo governing documents permit ownership by a trust and by a variety of other entities, purchasing the condo unit in the name of a trust or transferring the apartment to a trust thereafter is not a big deal. As is usually the case, things are more complicated with a co-op.
Things Have Changed
In the early days, most co-ops did not permit ownership of cooperative shares by a trust, and today, still prohibit ownership by business entities. The concern was primarily over the financial wherewithal of the trust entity that would be holding title to the shares. Over time, co-op boards realized that trust ownership, under certain circumstances, would not create an undue burden on the co-op provided that certain steps were taken to protect the co-op's interests. Even today, not all co-ops permit trust ownership of shares, but many do. In most cases, however, the shares are initially purchased by the co-op owner, individually, and transferred to the trust after a period of time. Although the purchase of shares directly into a trust avoids the necessity of additional paperwork and an additional closing in some cases, it is a rare occurrence.
What do the Co-op Governing Documents Say?
Before going too far down the road, a look at the governing co-op documents (that is, the by-laws and proprietary lease) should disclose whether trust ownership is permitted. If you're still unsure, check with the managing agent. Expect to incur costs in order to accomplish a transfer as the co-op or condo will have to get its counsel involved to prepare documents. Assuming trust ownership is permitted, here are a few concepts to keep in mind when considering a transfer to a trust.
The Mechanics of Trust Ownership
Although there are various types of trusts that can hold co-op shares, for our purposes, it usually comes down to either an “irrevocable” trust or a “revocable” trust. Technically, the shares are actually held by the “trustee “of the trust, but title to the property is always described as being “owned” by the trust. Once the shares are donated by the “grantor” or creator of the trust to an irrevocable trust, the grantor of the trust no longer owns the shares and gives up complete control over the ownership and disposition of the shares. The trust provisions can’t be changed and the shares will be disposed of as provided in the trust agreement (subject to Board approval as discussed below). When an irrevocable trust is used, the grantor’s intention is to exclude the shares from his or her gross estate, so a gift to the trust may accomplish that goal. In other situations, however, the revocable trust is used to hold the shares as the grantor continues to be the beneficial owner of the shares and can hold or transfer the shares as he or she sees fit. There is no loss of control and maximum flexibility, but there is no estate tax savings from using this type of trust.
The revocable trust vehicle works particularly well for folks with privacy concerns, if a designated trustee is unconnected to the grantor by name or position. That being said, since shares are usually acquired individually at first, the identity detectives who search ACRIS will be able to determine who originally owned the stock. Nevertheless, on a day-to-day ownership basis, privacy is significantly increased by ownership by an unidentifiable party who acts as trustee. Since the revocable trust agreement can provide for change of trustee as the grantor determines, the trustee of a revocable trust serves at the pleasure of the grantor and the grantor can control who undertakes that role.
A Word About Condos
As mentioned, most condo governing documents permit ownership by a trust. That being said, condos can require a personal guaranty by the grantor of the trust or a security deposit to cover future common charges. Still, the process with condos is considerably easier. There are also title issues to be considered, as the original title policy, in most cases, will no longer be effective if the property is transferred to a trust, even though it is an affiliated entity.
What to Expect From the Co-op
When the co-op permits trust ownership, the co-op will prepare a standard set of documents which usually include the following:
--an agreement on the part of the trustee of the trust, among other things, that prohibits any material changes to the trust as well as requires Board approval for any subsequent transfer;
--a personal guaranty of the trust’s financial obligations to the co-op by the grantor of the trust; and
--an “occupancy” agreement by which the grantor of the trust designates the parties who will reside in the apartment, including the grantor’s spouse and immediate family.
Documents might vary from co-op to co-op, but the point of the paperwork is to insure that the monetary obligations of the co-op will be paid and that all future transfers will be subject to Board approval. For the most part, the documentation is “boilerplate” and the co-op owner who is eager to fulfill an estate plan or who needs greater privacy, signs the required documents without much negotiation. The co-op owner will also reimburse the cooperative for legal costs incurred for preparing the documents and for charges from the managing agent if a closing is required to complete the process.
When there is an Outstanding Co-op Loan
If the shares are owned free and clear of any financing, the process for transferring the shares to a trust doesn’t require much action other than satisfying the co-op’s requirements. Things can get complicated if the co-op shares have been pledged to a bank in connection with a loan. Since the bank holds the stock certificate and proprietary lease as collateral, if the co-op owner wants to transfer the shares, subject to the existing co-op loan, the bank must consent to the transfer and show up with the stock and lease in order to complete the transfer process. When that happens, the original loan documents will be revised to reflect ownership of the stock and lease by the trustee, but liability for the indebtedness will remain the obligations of the grantor.
More Hoops and Hurdles
Getting the bank’s timely cooperation in connection with a proposed transfer depends on the bank and cooperation can vary significantly. In one recent transfer request, the bank literally took months to go through the trust agreement and to locate the stock and lease. Once the bank had finally agreed to the transfer, the bank’s counsel raised issues about an obscure provision of the trust and wanted certain language changed or removed. Finally, the exasperated client couldn’t take any further delays and decided to just pay off the loan and get the bank out of the picture. Not every lender’s back office is as disorganized as this large bank, but expect a low level obstacle course when the lender is agreeable to allowing a transfer to a trust.
What About Condo Liens?
If the condo unit is subject to a mortgage lien, theoretically, the bank’s consent should be obtained before a transfer to a trust is completed. Since the unit owner could simply record a deed from the unit owner to the trust, subject to the existing lien, it is possible to complete the process without obtaining the bank’s formal consent. As the mortgage documents undoubtedly provide that any transfer will require the bank’s consent or will result in the acceleration of the payment of the entire outstanding indebtedness, transferring the condo to trust without the bank’s consent has serious risks and should not be done without review of the particular facts of the situation by the unit’s owner’s attorney.
Residential Reality: Trust Ownership Works
Under the right circumstances, ownership by a trust often facilitates estate planning and can shield high profile owners from the prying eyes of the public when the designated trustee protects the identity of the grantor. Trusts can be formed for many reasons, the ownership of real estate being one of them. Consulting you estate planning professionals is essential for a deeper understanding of whether trust ownership is appropriate before considering any property transfer for such purposes.
Note to Readers: My thanks to estate lawyer, James Kelly, a partner at Davidson, Dawson & Clark LLP, who assisted in the preparation of this article.