Trust Transfers: Considerations for Cooperative Boards
It is becoming increasingly common for shareholders to seek the transfer of their cooperative shares into Trust as part of their estate planning. This allows the shareholder to avoid probate in the future and provides them flexibility in managing their assets.
Although a Trust transfer can be very similar to standard share transfers, there are some additional considerations a Cooperative Board should take into account before moving forward with any Trust transfer.
Prior to Board Approval
Before any Trust transfer is approved, the Board should have their legal counsel review the Trust agreement and provide any necessary edits or revisions to the Trust attorney to incorporate into the agreement. Of specific importance is the inclusion of any “Spendthrift” provision.
These provisions are included in trust agreements to shield the assets of the Trust from potential creditors or beneficiaries. When the attorney is reviewing the proposed trust agreement, they should provide language to be included in the Trust that shields the Cooperative from the Spendthrift provision, thereby allowing the Cooperative to access Trust assets in case of default.
What Should the Cooperative Require?
Outside of requiring Board approval, there are other steps a Cooperative Board can take to protect itself and the Cooperative in these situations. In particular, the Board should require additional documentation from the Shareholder, Grantor, and Trustees. These documents include: (1) an Occupancy Agreement; (2) Guaranty; (3) Trust Affidavit; and (4) Trust Acknowledgement.
The first two documents are most relevant to the Board’s interest in a Trust transfer:
- Occupancy Agreement: This agreement ensures that the Trust, as an entity, is bound by the same rules in the Proprietary Lease as an individual shareholder would be. It will control who can occupy the Unit, how the shares can be transferred, and which transfers from the Trust will require Board approval. Each Occupancy Agreement can be tailored to the individual needs of the Board and the specific shareholder seeking to transfer their unit into Trust.
- Guaranty: A Guaranty ensures that there is an individual with fiscal responsibility for all maintenance payments, special assessments, and any defaults by the Trust. The Guarantor is typically the current shareholder who is making the Trust, but the Board may decide to accept a Trustee as the Guarantor if they can prove they are financially responsible.
A shareholder’s decision to transfer their cooperative shares into Trust is a common estate planning technique that Cooperative Boards should be aware of. When confronted with a possible Trust transfer, a Board should ensure that the proposed Trust is properly reviewed for any provision that could negatively impact the Cooperative, and the Shareholder and future Trustees must be required to execute an Occupancy Agreement and Guaranty to protect the interests of the Cooperative.