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YOUR HOME; Transferring A Co-op To a Trust
By JAY ROMANO
BUYING a home is one of the most significant investments of
a lifetime. So when homeowners start thinking about estate planning,
a major issue is what will become of that investment. While owners
of houses and condominiums can usually do whatever they want with
their property, co-op shareholders usually cannot.
One difficult issue facing co-op boards today, lawyers
say, is whether shareholders should be permitted to transfer ownership
of their shares to trusts -- legal entities set up to contain
assets. Such trusts are frequently used in estate planning.
Martin Shenkman, a Manhattan tax lawyer, said there are two
types of trusts that most frequently raise questions for co-ops:
the Qualified Personal Residence Trust, or ''QPRT'' (pronounced
''Cue-pert''), and the revocable living trust.
A Qualified Personal Residence Trust, Mr. Shenkman said, makes
it possible to save money on gift and estate taxes by allowing
a homeowner to reduce his estate by transferring a principal residence
and up to one vacation home to a trust for a specified period
of time. At the term's expiration, he said, the trust transfers
the property to a beneficiary -- typically someone who would have
otherwise ended up with the property by inheriting it.
The savings result because the value of property in a Qualified
Personal Residence Trust is discounted, for tax purposes, to an
amount significantly lower than its market value. And while the
property is still subject to gift and estate taxes, those taxes
are reduced or even eliminated because they are based on the discounted
value assigned to the property at the time the trust was created
and do not reflect any subsequent increase in value.
For example, Mr. Shenkman said, a $1 million property placed in
a 15-year Qualified Personal Residence Trust by a 60-year-old
homeowner would be valued for tax purposes at only $275,180, and
would remain at that level even if the value of the property increased
over the 15 years.
The catch with a Qualified Personal Residence Trust, however,
is that the discounted value is applied only if the grantor --
the person who created the trust -- outlives the term of the trust
and the property is transferred to the trust's beneficiary. If
the grantor dies before the term ends, Mr. Shenkman said, the
property is taxed as part of the estate like any other asset.
The benefits of a Qualified Personal Residence Trust are accompanied
by certain risks: a grantor who outlives the trust must also insure
that the beneficiary will allow him to remain in occupancy after
the beneficiary takes title. With houses and condominiums, Mr.
Shenkman said, such risks are the sole concern of the property
owner. With a co-op, however, any risks are the
concern of all shareholders.
Richard Siegler, a Manhattan lawyer who specializes in co-ops
and condominiums, said that for several reasons, co-op
boards are skittish about allowing shareholders to transfer their
shares to a QPRT. For example, he said, once the shareholder transfers
ownership of the shares to the trust, it is the trust -- a legal
entity that has no assets other than the shares themselves --
that is now responsible for paying maintenance fees and abiding
by the proprietary lease.
And if the QPRT is successful -- that is, if the grantor outlives
the trust and the shares pass to the beneficiary -- the co-op
corporation then finds itself with the former shareholder as a
subtenant in the apartment and the shareholder's beneficiary --
who may or may not be financially acceptable to the co-op
-- as the legal owner of the shares. The situation gets even murkier
if the beneficiary decides he wants to evict the grantor and occupy
the apartment.
''The decision to permit a trust to own co-op shares
and proprietary leases is a policy decision,'' Mr. Siegler said.
''In recent years, more sophisticated boards have been permitting
such transfers. But some boards have determined that nonindividual
ownership of co-op apartments is inconsistent with
the basic co-op housing principle of owner occupancy.''
Such a determination is final; if the board says no, the shareholder
cannot transfer the shares.
Saul Simon, a lawyer and financial planner in Edison, N.J., said
that concerns are also raised when a shareholder requests permission
to transfer shares to a revocable living trust.
Such trusts are primarily used to provide people with greater
control over assets in the event of a disability and greater privacy
when assets are transferred upon death. Generally, Mr. Simon said,
a revocable living trust is a repository for all of an individual's
assets. When the grantor dies, the assets are automatically transferred
to the beneficiaries.
In a sense, Mr. Simon said, a revocable living trust is a substitute
for a will. In some cases, he said, it is somewhat easier to deal
with than a will because unlike wills, trusts do not have to be
probated.
And that, he said, can be an advantage for people who want to
keep the contents of their estate private; when a will is probated
it is generally filed in the public record. The transfer of trust
assets, however, can remain confidential.
A living trust may also be useful for people who have established
residence in another state but still own an apartment in New York.
Putting the apartment in a revocable living trust, he said, will
eliminate the necessity for probate in New York if the only asset
in the state is the apartment. Still, co-op lawyers
say, most of the concerns about QPRT's also apply to revocable
living trusts.
''Some co-op boards have a knee-jerk reaction to
trusts and say 'no' without even knowing why,'' said Arthur I.
Weinstein, a Manhattan lawyer who is vice chairman of the Council
of New York Cooperatives and Condominiums.
Mr. Weinstein said that such reactions are not entirely unwarranted,
that there are indeed concerns that must be addressed before a
co-op can consent to the transfer of shares to a
trust of any kind. Nevertheless, he said, such concerns can usually
be adequately addressed.
For example, he said, one concern with either a revocable living
trust or a QPRT is that a shareholder who has been approved by
the board is asking to transfer his shares and proprietary lease
to an entity with no relationship with the board.
And while that difficulty may be surmounted by requiring the original
shareholder to sign a personal guarantee to insure the continued
payment of maintenance charges, such a guarantee may be a cause
of concern for the board if the original shareholder has divested
himself of all assets by transferring them to a revocable living
trust.
''The thing to do in that situation is to collect a maintenance
escrow in an amount sufficient enough to make the co-op
comfortable,'' Mr. Weinstein said, adding that a requirement for
a full year's advance maintenance would not be unreasonable.
It is also necessary for any shareholder who wants to transfer
shares to either kind of trust to sign a new agreement with the
co-op making the shareholder subject to the terms
of the proprietary lease when he becomes the trust's subtenant.
The trust itself must agree, in writing, Mr. Weinstein said, that
it will not sublet the apartment to anyone other than the original
shareholder.
The co-op should also insist on receiving a legal
opinion from the shareholder's lawyer indicating that the trust
has been properly -- thereby injecting another responsible party
into the process and providing additional protection for the co-op.
And finally, Mr. Weinstein said, the co-op should
make the shareholder responsible for any legal expenses incurred
by the co-op for reviewing the necessary documents.
''Permission to transfer shares to a trust is often economically
important to a shareholder,'' Mr. Weinstein said. ''And while
there are problems that may have to be addressed, those problems
are usually solvable provided the shareholder is willing to cover
the cost of solving them.''