Understanding Rights of Inheritance Putting a Plan in Place

Understanding Rights of Inheritance

They are subjects no one ever really wants to discuss: death and divorce. But when it comes to safeguarding an asset as valuable as a family co-op or condo,  those discussions become imperative, however uncomfortable they may be. Should the worst occur, it is always better to have an actionable plan in place than to have to scramble after the fact – something that only adds to the stress and pain of loss. 

Stories of feuds erupting over properties and assets litter just about every family tree. With the right planning and advice from the experts though, those icy phone calls between sons, daughters, and mothers (as well as attorneys) can be sharply curtailed – or even avoided entirely. 

Understanding the Basics

When addressing issues of death and property, co-ops and condos are different assets, and thus must be handled differently. “Condos are real estate, so if the title is in the decedent’s name, an executor must be appointed by the New York Surrogate Court,” says attorney Gerald J. Dunworth of the firm Gibney, Anthony & Flaherty, LLP, in Manhattan. “Co-ops usually allow transfers to spouses, but not always to children or other family members without the new owner being approved by the co-op board.” 

Mindy H. Stern, a partner at the Manhattan-based law firm of Schwartz Sladkus Reich Greenberg Atlas LLP, adds that there are sometimes exceptions to those co-op transfer rules. “The extent of those exceptions varies,” she says. “For example, some allow transfers without prior board approval to a deceased shareholder’s spouse. Some also include parents, adult children, or adult siblings in the ‘no consent required’ exception. Others state that the board will not unreasonably withhold its consent to a transfer to a ‘financially responsible member’ of the deceased shareholder’s family, and specify who is ‘family.’ But this still requires the family member who wishes to inherit the unit to be vetted and approved like any other prospective owner.” 

If the designated heir does not get approved by the board, then “The apartment must be sold,” says Dunworth. “Controlling who will live in the building is the central purpose of forming a building as a co-op.” 

With regard to condos, Stern says, “They typically don’t have a ‘thumbs up’ or ‘thumbs down’ approval process like co-ops. More often, they give the condo board two options: either exercise a right of first refusal and buy the unit from the unit owner on the same terms as the unit owner has contracted with a third party, or waive that right. And many condo bylaws allow unit owners to transfer units without any restrictions on death pursuant to a will or by intestacy – when there is no will – or by gift during the unit owner’s lifetime.” 

Passing to the Next Generation 

When it comes to responsible planning for the inevitable, it can provide substantial peace of mind to appoint an executor who will be responsible for much of the paperwork and “administrative” side of things upon the individual’s passing. The executor will be tasked with everything from securing the apartment and changing the locks, if necessary, to checking for an insurance policy and ensuring the bill has been paid, says Dunworth. In addition, they will be expected to “pay the monthly maintenance, obtain access to the apartment to secure important papers, including wills and trusts, collecting the mail and, if it is a condo, paying the property tax.”

According to Stern, other duties of the executor may include “finding and preserving all of the estate assets; identifying all creditors and paying all debts deemed legitimate; valuing all assets; determining what taxes (such as estate and income) must be paid and filing all necessary tax returns; and carrying out the deceased person’s wishes if there is a will.”

It is certainly no easy task serving as an executor or estate administrator. “Executors can be held personally liable for distributing assets too soon – before creditors have the time granted to them by law to file notices in the court – or otherwise not fulfilling their duties,” says Stern. “Because the law recognizes that this is a significant responsibility, executors and administrators are entitled to commissions, which are set by statute and based on the size of the estate being administered.”

Of course, an even bigger question beyond the naming of an executor is deciding who will inherit what. These determinations often can be fraught with emotion as spouses and siblings may ultimately end up feeling slighted or left out. As in any such proceeding, it’s always best to make decisions based on facts and good financial planning. 

“It is very common for people to think that their co-op and other possessions will automatically pass to their loved ones upon death,” says attorney Ann-Margaret Carrozza of the Law Offices of Ann-Margaret Carrozza in New York. “This is not true. Without a properly-drawn will, a decedent’s loved ones will be in court for more than a year administering the estate. Often, an apartment cannot be sold during this period, and maintenance and other charges, together with hefty legal fees for the drawn out ‘intestate’ will eat up much of the estate.” 

With that worst-case scenario in mind, it is vitally important that “A co-op owner should have a will or trust that sets forth who will inherit the apartment upon the death of the shareholder,” says Carrozza. “It is also very important to have a power of attorney so someone is appointed to carry out the shareholder’s obligations such as payment of maintenance in the event of a disability.” 

Because estate taxes can be significant, people sometimes consider transferring their co-op or condo to a spouse or adult child before death. Before taking that step, however, all aspects of the arrangement should be considered under the watchful eye of a financial planner. Says Dunworth, “This analysis involves a comparison of potential estate tax savings if the value of the apartment appreciates after the date of the gift with the potentially increased capital gains tax that will be paid if the heirs sell the apartment after the death.” 

Says Stern, “There are potentially significant income and estate tax consequences to the transfer of assets during lifetime and at death. My best advice is for someone to consult with their estate planning attorney, financial advisor, and accountant before proceeding with any asset transfers, including co-ops and condos.”

Another option outside of a will is the use of a living trust, says Dunworth. If a living trust is used, “The apartment ownership should be changed to the trust,” he says. “If the apartment is a condo, then a new deed must be filed transferring the apartment to the trust. If the apartment is a co-op, then the board must approve the transfer to the trust. Twenty years ago, co-op boards would not approve ownership by a trust.” Today it is a common practice, but it requires an extra level of administrative work, including the procurement of numerous documents. 

Carrozza says there are distinct advantages to trusts for co-op owners. “The often lengthy probate process is avoided entirely. Unlike an outright gift to children during life, the trust will eliminate all capital gains tax consequences upon the death of the trust creator.” 

For individuals who pass on without a will, estate plan, or trust in place, the distribution of assets will be dictated according to state law. In New York, the cascade of inheritance is very specific. For example, “If someone dies with a spouse and no children, the spouse inherits everything,” says Stern. “If there are children and no spouse, the children inherit everything, in equal shares. If a child of the deceased owner died before the owner died and is survived by children, those grandchildren step into the deceased child’s shoes and inherit the deceased child’s share.” The list goes on, but the key takeaway is that it takes careful planning to avoid the state dictating who gets what.

Love – and Property – Will Tear Us Apart

When it comes to the other troubling “d” word – divorce – it is equally important to have the right documentation and processes in place to avoid a legal battle. “It is very important to protect one’s self against a financially-ruinous breakup,” says Carrozza. “This is done with a prenuptial or cohabitation agreement. The terms of these documents should spell out the rights and responsibilities of each partner in the event of a breakup. Specifically, how long the non-owner may continue to reside there while making other living arrangements, and/or how many months of maintenance a departing shareholder is responsible for.” 

There are a whole host of specifics that can be spelled out by a pre- or postnuptial agreement, says Stern. “The agreement should address all of the issues – if one spouse will receive the apartment as part of a lump sum settlement of property issues, or have a first option to buy out the other spouse’s interest – and if so, at what price and other terms.”

This preemptive paperwork can also address what happens if the unit is to be sold, and determine the procedures for selecting a broker, setting a listing price or when an offer must be accepted, and what must be done with the proceeds of the sale. It also can determine occupancy arrangements, and who will pay the carrying charges until closing. It can even detail who will pay the relocation expenses of the individual moving out.

“Deciding all of this before marriage is better than after marriage, because after marriage the equitable distribution laws govern how assets are split,” says Stern. “So if one party wishes to deviate from how the law would dictate the disposition of the apartment, the best way to do that is to reach agreement before getting married.” 

Ultimately, whether the intention is to protect an apartment in the event of death or divorce, good planning remains the best way to achieve that goal. “Have a clear plan whether the property should be sold, or given to one or more of the beneficiaries,” says Dunworth. “Include in that plan how long any of the beneficiaries are allowed to live in the property prior to sale, and who must pay for the recurring expenses before sale.” 

In addition, estate law pros strongly advise making plans for what is inside the four walls of the co-op or condo, as well as for the property itself. “Plan for an expeditious disposal of the household furniture and other personal property in the apartment,” Dunworth says. “The family emotions surrounding personal property are among the primary causes of disputes during estate administration.” 

When it comes to something as important as estate planning, it is imperative to seek the right professional advice. “Approach the planning as a team sport – consult your attorney, financial advisor, accountant, and insurance advisor about how best to achieve your goals,” says Stern. “Failing to put one’s affairs in order does your family a disservice because it often leads to disharmony, higher expense, and more emotional trauma for the family at a time when everyone is grieving the loss of a loved one. Every property owner should enjoy the peace of mind that comes with proper planning.”                                    

Liz Lent is a freelance writer and longtime contributor to The Cooperator. 

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