By Eric M. Goidel, Esq.
Borah, Goldstein, Altschuler, Schwartz & Nahins, P.C.

Due primarily to developments in probate, estate tax and Medicaid issues, Boards of Directors of cooperative corporations are receiving an unprecedented number of requests by shareholders to transfer their stock shares and proprietary leases out of their individual names and to Trustees of Trusts created by them. Many boards have dismissed such requests out of hand, often to the ultimate financial detriment of their shareholders. There is no legal prohibition against the Board of Directors recognizing such transfers and in point of fact, the recognition of such transfers will assist shareholders as they engage in estate planning by enabling them to remove a substantial asset from their estate.

It is necessary however to provide for certain protections for the apartment corporation, as a Trust is really an amorphic entity.

Typically, various assets of an individual are placed in the Trust by the property owner (“Creator”) with some reservation of a life or shorter estate to have the use and enjoyment of the property (“Res”), which has been placed in trust. The Res is administered by a trustee or trustees who may or may not include the original owner of the Res. Upon either the death of the Creator of the trust, or the happening of some other contingency, as defined in the trust document, the Res is transferred to a beneficiary or beneficiaries designated in the trust document.

Apartment corporations should have the following concerns with respect to such trust situations:

1. Has the shareholder obtained approval from any existing lender to transfer the stock and proprietary lease to a trust?
   
2. What does the trust document provide? In this regard, it is recommended for the apartment corporation through its attorneys to review the entire trust document to understand the following and other issues:
   
   a) Where is the trust created?
   b) Who are the trustees of the trust?
   c) Who has the right to reside in the apartment during the term of the trust?
   d) Who will be entitled to issuance of the stock and the proprietary lease when the trust terminates?

Various issues abound concerning the actual trust documents.

First, if the existing shareholder is not the individual who will reside in the apartment during the term of the trust, then the Board of Directors will need to know who will be residing there. The Board would probably want to interview those individuals. The ultimate beneficiary of the stock and the proprietary lease should also be interviewed and checked for financial qualifications, as to approve the transfer to the trust implicitly approves the transfer to the beneficiary. Alternatively, the Board of Directors can provide that the ultimate beneficiary may be entitled to own the stock and proprietary lease solely for the purpose of sale, but may not be allowed to reside in the apartment, unless the then existing Board of Directors approves occupancy at the time that the beneficiary would be entitled to receive the stock and the proprietary lease.

The Board should require that independent of the trust, some individual or individuals guaranty the maintenance and other financial obligations for the apartment, as the trust may not have income to cover these obligations. Since we are seeing many of these trusts created out of state, it is necessary to have the trustees agree to designate an agent for service of process within the City and State of New York and further agree that venue for any action brought by the apartment corporation would be properly placed within the state court system in the State of New York.

Surprisingly, many apartment corporations deny transfers to trust, but willingly add family members to stock certificates and proprietary leases. This adding of family members is not as desirable because the Board of Directors will likely be approving individuals who have no present intention to reside in the apartment.

Once the original shareholder vacates, the apartment, or passes away, any shareholder remaining on the stock certificate and proprietary lease may continue to live in the apartment or assume occupancy. Accordingly a proposed additional shareholder should have to qualify individually for the apartment on financial grounds and should be required to submit to an interview. A problem however is posed because by adding that individual as a shareholder, the Board of Directors is preconsenting to that shareholder’s entire family down the road, even though the family might not even exist at the time of the transfer. These situations raise the spectre that the household composition may be undesirable, or that the remaining shareholder may not be financially qualified at the time that he or she becomes the sole shareholder.

Other issues concerning possible bankruptcy, future litigation, jurisdiction and venue (particularly if the additional shareholder resides in some location other than New York City) might only serve to complicate the lessor-lessee relationship.

In summary transfers to trusts will generally have a neutral effect for an apartment corporation while significantly benefiting existing shareholders. To the contrary adding family members who do not actually reside in the apartment may be fraught with dangers for apartment corporations

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