Passing it On Wills, Trusts & Prenups

 When co-op and condo owners plan their will, or a prenuptial agreement, their  condo or co-op unit naturally comes into play as an important asset. Often, it’s no problem—the owner leaves the apartment to his or her spouse. It’s especially simple when both names are on the will.  

 But this is life, and all sorts of things can happen. What happens if an owner's  wife dies, he forgets to make out a new will, and there are three children? Or  what happens when there’s a sudden divorce with no prenuptial agreement, and both parties want the  co-op?  

 Or what happens when, as in the case of a friend of this reporter, a man lives  with a woman for years, but the couple never married, and the man never got  around to putting his partner's name on the lease, although he always meant to?  The man dies suddenly—does the girlfriend have any legal standing to remain in the apartment?  

 This complicated field is known as trusts and estates, and trust us, it’s complicated—that’s why there are attorneys who specialize in nothing else. For this article, we  have enlisted the aid of several attorneys to answer some common questions that  co-op and condo residents, board members, and managers might have when the  unexpected suddenly hits.  

 Condos vs. Co-ops

 In the event of an an owner's death, how is dealing with a co-op apartment  different than dealing with a condo—providing that the bereaved doesn’t also have his or her name on the lease or the stock certificate? The answer  lies in the basic difference between the two types of units—in the first, you’re a shareholder in the co-op corporation, and in the second, you basically own  the unit outright.  

 In a condo, says Manhattan trusts-and-estates attorney Kenneth R. Haas, there  are typically very few restrictions on who you can give the condo to, although  each condo does have its own rules and regulations.  

 The condo typically may have the “right of first refusal,” which means the board can exercise its right to buy the apartment itself, then  resell it. However, bylaws give boards a fairly short period of time to  exercise such a right. And condo bylaws typically permit transfers of units to  family members. All in all, the use of such a right is the exception rather  than the rule.  

 On the other hand, Haas says, “A cooperative corporation will have to approve [the transfer] if that person is  going to become part of the proprietary lease. If the board votes against  'Joe,' then he will have to dispose of the unit. In one situation, the co-op  board wouldn’t allow the person to move in unless that person put up six months rent in  escrow.”  

 Cases of Divorce

 In the case of divorce, says Manhattan attorney Ronald Gitter, who writes a blog  for Coopandcondo.com, the issues are basically the same for co-ops and condos.  

 “In each instance,” he says, “both the purchaser and the co-op or condo will need confirmation that the party  claiming the right to sell the asset after the divorce, has that right pursuant  to the terms of a separation agreement or divorce decree. Even if ownership of the asset after the divorce has been established, if the  shares of the co-op or title to the condo is still in both names after the  divorce, the cooperation of the party who will not benefit from the sale will  be required.”  

 This writer knows of a divorce in a Mitchell-Lama co-op that had an unusual  outcome. The wife, who had custody of her son, kept their two-bedroom co-op  apartment—but the co-op management gave the husband another apartment in the same  development!  

 Documentation

 What sort of documents should a co-op owner have to protect his or her property  during a divorce or to ensure that his or her wishes regarding the apartment  are carried out after death?  

 In many cases, people put the apartment into a living trust—an arrangement in which one person, called a trustee, holds legal title to the  property for another person, called the beneficiary.  

 Attorney Mindy Stern, a partner in the firm of Schoeman, Updike & Kaufman, says that in the case of divorce, the state’s divorce laws are basically governed by the concept of equitable distribution.  

 “Unless the parties agree between themselves how to divide their assets,” she says, “a court decides based on a variety of factors, such as the length of the marriage and the contributions of  each of them to the marriage.”  

 To avoid having the court make such an important decision for you, a prenuptial  agreement is always a good thing to have. In the case of death, adds Stern,  having the husband and wife as joint tenants is usually the easiest way. But  even if this is not the case, she says, spouses in New York State “cannot be completely disinherited. A surviving spouse is entitled to one third  of the deceased spouse’s estate, and that one third cannot be in a trust.”  

 There are some documents that will trump a will in terms of legal preeminence.  Haas explains that if you’re the designated beneficiary in any form of ownership—say, a life insurance policy—that person will get the asset irrespective of what it says in the will. “If you have life insurance, an IRA account, a 401K, a joint bank account, the  asset will go to the named beneficiary,” he says.  

 That’s why, of course, it’s important that all your documents are consistent with each other.  Unfortunately, the older many people get, the more they lose track of their  affairs.  

 Tax Benefits

 Should condo or co-op owners transfer their apartment to a spouse or child for  estate tax benefits?  

 Attorney David Byrne, a partner in Herrick, Feinstein LLP, with offices in New  York and New Jersey, says, “Generally, if the owner resides in the condo and co-op apartment after the  transfer, there will not be tax benefits. If the condo or co-op apartment is  purely an investment property, there might be tax benefits.”  

 “Aside from tax issues,” adds Stern, “the donor should consider whether to make the gift outright, or in trust. There  are a variety of reasons (succession planning, creditor protection, Medicaid  planning, being just a few) why someone might prefer a trust arrangement to an  outright gift.”  

 In general, say experts, this is a very complicated issue, and apartment owners  should contact an estate attorney for advice.  

 Duties of the Executor

 Once the original owner dies, what should you expect if you are named as the  executor of a co-op or condo estate?  

 The executor, says Gitter, is responsible for the same liabilities that would be  incurred by the deceased owner—monthly carrying charges, for example. If the deceased owner was in litigation  involving the apartment or had outstanding liabilities, then, of course, it  becomes more complicated. Still, he says, it wouldn’t create any personal liability for the executor, provided that that executor  carries out his or her fiduciary duties to the estate.  

 In addition, the executor has to find and value all of the estate’s assets. That might prove difficult in the case of a deceased elderly person  who has many bank accounts that he has forgotten about, in bank branches that  have long since merged or closed, or a safety-deposit box for which he has long  since lost the key.  

 In general, the executor, says Stern, has to pay the deceased’s final debts, expenses and taxes, file all income and estate tax returns, and  distribute the net estate to the parties entitled to receive it—for example, the other parties named in the will.  

 Dealing with the Board

 The co-op or condo board, as part of a transfer of ownership, will also require  several documents, such as a death certificate, a certified copy of the will, a  release of estate tax liens from New York State, proof that there is no federal  estate tax owed, and more. Once again, in such a situation, it is best to  consult a trust or estates attorney.  

 Talking to the board can sometimes be easy—say, if both you and your spouse’s names are on the lease. But, other times it can be a problem. Haas says that  most co-op proprietary leases have “boilerplate language” that transfer of property other than to a spouse has to be approved—even if it’s to a son or daughter.  

 “The approval will not be unreasonably held up but it still has to go through the  board,” he says. “The only one who gets a free ride is the spouse.”  

 Problems, Problems

 Since estates and trusts are such a complicated subject, it’s only natural that many untrained people have misconceptions about the process.  Many people don’t even prepare an estate plan to begin with.  

 “The biggest problem people have,” says Haas, “is that they don’t sit down and try to understand what will happen with their co-op if they give  it to their cousin. The cousin may not be able to live there. Or if there’s a mortgage on the co-op, how will that be taken care of?  

 “I once had a case of a lady who died, and the co-op had a reverse mortgage on it  that had to be paid within 60 days. They were going to foreclose on the  apartment and I had to go to court.”  

 Unit owners also often don’t take into account what will happen with estate taxes. For example, says Stern,  “Sometimes people think that if a co-op apartment or condo unit is owned jointly  with someone, or owned by a revocable living trust, it is not included in the  taxable estate of the first person to die.”  

 That, she says, is simply not true. “The IRS includes all assets—whether they pass under a will, or outside of it through the designation of a  specific beneficiary or joint owner; or in a revocable trust in the taxable  estate for estate tax purposes.”  

 In general, experts agree that when planning the disposition of their co-op or  condo unit, owners should sit down with professional advisers, whether they be  attorneys, financial planners or accountants and go over all eventualities.  They need establish just what assets they own.  

 Another good step to take is to include the disposition of a co-op or condo unit  in your will. Once you have done this, Stern recommends that you review your  plan every five to seven years. There may be significant changes in the  interim, as far as health, marital status, employment, etc.  

 Remember, if someone has all their papers in order and has followed professional  advice for years, when the unexpected happens, it makes things easier for  everyone.    

 Raanan Geberer is a freelance writer and a frequent contributor to The  Cooperator.

 

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