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Good morning, good afternoon, good evening to everyone. This is a new episode of Rock the Closing. We’re gonna talk about today how to avoid probate if you own a co-op apartment.

So what are the practical steps? What are the considerations? What can you do?

So how to avoid probate if you own a co-op apartment. The reason we are talking about this today is because I had a couple of clients coming with exactly this question to me. And it happened in the past, and it takes a bit of back and forth thinking.

And obviously the best is to discuss it with an estate and trust attorney. But once again, this question very often pops up if there is a change in circumstances in a family who owns a co-op apartment, and people start to think about legacy, about their beneficiaries. And the most important question that pops up is, how can we simplify the process when we no longer there?鈥�

鈥淗ow can we make life easier for whoever takes over our co-op apartment? What can we do to make it more simple? So Dalia, who do we have as today’s guest, who will help us to talk about this?

Orsolya and I are so excited that joining us on our podcast today is our very favorite trust and estate attorney, Bracha Etengoff. She is a wonderful trust and estate attorney with a lot of knowledge, and she’s going to help us out today through this somewhat complex topic. Bracha can be contacted at her email, bracha at brachalaw.com.

And her phone number is 347-640-0993.

Of course, that is all on our website, and we have all the resources to get in touch with her if you have any issues or anything that you need to get in touch with her about regarding these topics. So we’re really excited to have her today because probate is sometimes a scary word for attorneys who don’t do probate, especially some real estate attorneys. So it’s great to have her with us to help us out with some of these topics.

Welcome, Bracha.

Thank you so much, Dalia. It’s great to be here.

鈥淏racha, so let’s dive in. So what is probate and what is the problem for a co-op apartment? So many New Yorkers own a co-op apartment.

Sometimes it’s the only ownership is a co-op apartment. So what it means for them if the apartment has to go through probate. Can you let us know?

Sure. So probate means taking a will to surrogate court to get it validated, kind of put into effect and getting an executor appointed to the estate. If you don’t have a will, there’s a very similar process called administration.

But either way, it does tend to take a long time. So what do I mean by that? Six months, a year in downstate New York, where we have most of our co-ops, we have a backlog in these surrogate courts.

And the problem we have with co-ops is that the shares are personal property. They’re not real estate. So a tool like a transfer on death deed that will apply to a house or a condo, and allow it to pass outside of probate, is not something that we can use for a co-op.

Interesting. Okay, good to know

鈥淲hat happens now during the probate?

Like, can you sell the apartment? Can you rent it out? What are the beneficiaries’ obligations as far as like having to pay the charges?

You know, how does that all work?

So you can’t sell the apartment until that executor is appointed. And that happens when the surrogate court issues what’s called letters testamentary or letters of administration. Until you get those magical letters, you’re not selling your apartment.鈥�

鈥淵ou’re also not renting out a co-op with a fresh lease. On the other hand, if there’s a tenant living there already, they have the same rights as other tenants, you know, in New York state and New York city. And you’re not, you know, barring the door on them either and locking them out.

They can continue living there.

Dalia, now let’s crack this open. You are my favorite real estate attorney. So if we want to avoid probate, what are the options there?

What can our shareholder do?

Yes, I do love to avoid probate for my clients. So I might advise that during your lifetime, in order to avoid probate, a good way to do that is that you put your beneficiary on the stock and lease and make them a joint ownership and make it joint ownership with rights of survivorship, right? So this is the most common and effective tool to get out of probate.

鈥淪o this way, when one owner dies, the surviving joint tenant automatically becomes the full owner, bypassing probate entirely. And sometimes at a real estate closing or at the transfer of a co-op, you’ll see there’s on leases or on titles, we can name joint owners with rights of survivorship, or we can also name them as tenants in common. Now, tenants in common is if one owner passes, their share goes to their heirs.

This is a way you will not avoid probate because now a share has gone to an heir and now we’re in probate. So with joint ownership, with rights of survivorship, we get to bypass that.

That’s amazing. And how does this work in practice? Could you give us an example for it?

Yeah, yeah, absolutely. I know sometimes it’s kind of, it’s a little hard to explain. And sometimes I have to explain at closing when people want to decide, how do I want to take title here?

How do we want to own this, right? So let’s say a couple owns this; a husband and a wife, or a couple partner and a partner own it, and one of them passes away? Okay, now the surviving partner starts thinking about legacy, right?

Maybe they have an adult child, and the current shareholder during their time, what they can do is gift a small percentage of their shares, let’s say 10% to that beneficiary. So they become joint tenants with rights of survivorship now as well. So when the shareholder passes away, the beneficiary automatically inherits the remaining 90%, also avoiding probate.

Okay, so let’s say you have a couple, one partner passes away, the surviving partner starts thinking about legacy. Let’s say they have one adult daughter. So now there’s a mother who owns 100% of the shares, and she’s wanting to pass that down to her daughter, but without probate.

So during her lifetime, she may gift, say, 10% of the shares to her daughter, the beneficiary. So now they become joint tenants with rights of survivorship. So when the shareholder passes away, the mother, the beneficiary, which is the daughter, automatically inherits the remaining 90%, avoiding probate altogether.鈥�

鈥淥rsolya, let me ask you. Now in my example, I gave the mother giving the daughter 10%. Why only 10%?

How does this relate to capital gains, taxes, how is that calculated, how does that all come into play when we’re talking about this sort of transfer of shares?

Thanks, Dalia, and it’s a great example. And I’m not going to answer this question by myself because it’s a very complex one. And again, any tax related questions should be discussed with your CPA.

But just to give you an insight why we are talking about gifting 10% to future beneficiaries or even less than 10% to future beneficiaries. So let me start explaining and I will pull both of you into this conversation because because I need your brains to answer this question very clearly. So in our example, let’s say that the mother decides to put the daughter on the stock and lease in 2025 and gifts the daughter 10% ownership on the stock and lease.鈥�
鈥淭he daughter and the mother, neither of them will have to pay anything in 2025 because we are talking here about a gift. However, when the mother passes, let’s say in 10 years, in 20 years or 100 years, then the co-op’s apartment value will be significantly higher than at the time the gift was made. So the tax authorities and the tax obligation will be looking at capital gains tax basis, which will be the time of gifting and at the time of selling off the apartment.鈥�

鈥淥bviously, if the daughter decides to move into the apartment, into the co-op apartment and live out her life there, there won’t be any capital gains taxes because she will be at the time of the mother’s passing 100 percent owner of the apartment. But in case the daughter says, I don’t need my mother’s apartment and I would like to put it up on the market as soon as possible, then capital gains taxes will be the difference between she received the apartment as a gift, the 10 percent and the time she is selling. But the basis for the capital gains taxes will be only the 10 percent value that she received.

Because for the remaining 90 percent, there will be a so-called step up basis. Look at that. Bracha, help me.

Step up basis. What does that mean?鈥�

鈥淪o a step up in basis means if you inherit the apartment. So let’s talk about that 90 percent that the daughter will be inheriting. Instead of the tax authorities looking back at 2025, when they’re comparing the value between the time of acquisition and the time of sale, they’re going to look at the date of death of the mother because that is when the transfer occurred.

So you said the mother dies in 2035. Let’s say the daughter sells the apartment in 2037. There really should not be, even in New York City, a tremendous amount of change in that small time, not enough to trigger capital gains tax, probably on that 90% at least.

Right. So basically what we want to do is, at the time the gifting is happening between the shareholder and the future beneficiary, you want to give the future beneficiary as little percentage as possible in order to avoid capital gains taxes in the future. What is critically important is that you want to avoid probate.鈥�

鈥淵ou do this whole process to avoid probate, and because of that, you just give a very small percentage to the future beneficiary. So that’s the key, and that’s the takeaway in terms of all this taxes, step-up basis and capital gains taxes.

These are things that it’s really good to know, because avoiding probate is going to save you money, save you time. Avoiding capital gains tax is also going to, you know, save you a lot of money, because that’s a really large percentage here in New York. So these are really small things that you can do with your attorney to avoid a lot of problems in the future.

So I think this topic is really important.鈥�

鈥淚’ll just note, Dalia, you see how we talked about this and how complex it is and how many factors you’re taking into consideration. This is, you know, cops, I understand, don’t have deeds, but similar, the stock and leases. It’s not as simple as, I’ll just put my child on the deed.

I’ll just put my child on the stock and leases. No, this is an entire analysis that should be done that looks at all the potential ramifications, including tax.

Yeah, absolutely.

Correct.

So now let’s turn into the practicalities. Dalia, how is this process? What does this whole process entail?

How do we put the beneficiary, the daughter on the stock and lease?

Okay. So this really all depends on the co-op, the management and the board. And so for every co-op, it’s going to be different.

If you’ve ever spoken to someone who lives in a co-op apartment building or two people, they have totally different experiences, right? You know, their board might be one way, their management might be another way. So it’s very dependent on that.鈥�

鈥淪o when you buy or sell a co-op apartment in New York City, you don’t just hand over the keys, kind of like you would outside of the city, like in Long Island, where we just, you know, hand over keys, here’s the deed, here’s the keys. What really happens behind the scenes is a transfer application, right? Because we’re not selling real property, we’re selling shares.

So a transfer application is the, or we’re transferring shares. So transfer application is the formal submission that allows the co-op corporation to review and approve the transfer of ownership from one tenant to another, or in some cases, a rental or a refinance. So in a co-op, you aren’t buying real estate, you’re buying the shares in a co-op, in a corporation.

So the board has the legal right to approve or reject any new shareholders. And that approval process begins with this transfer application. And I know that Orsolya and I have another podcast somewhere in our history, where we go over that sort of transfer application process.鈥�

鈥淎nd it usually includes submitting financial statements, tax returns, reference letters, purchase contract, various disclosures. And all these things are reviewed by managing agents. And then by the board itself.

So you may also hear a second term called the sale application. Now these two often get used interchangeably, but there is a distinction. So the sales application refers specifically to the situation where somebody is selling their shares to a new purchaser, right?

So they’re moving out, they’ve got a real estate agent who’s found a brand new purchaser, and here we have a sale application. Okay? A transfer application is more broad.

It can also apply to sublets, gifting shares to a family member, like the example that I gave earlier, estate transfers or even refinancing your loan. Okay? So all these would be a transfer application.

You’re always going to have to go through the co-op, the board, the management to do these things. Anytime the board needs to approve a change involving the shares of the co-op or the proprietary lease. So while every single sale triggers a transfer application, it’s not the case in a transfer application.鈥�
鈥淎nd it usually includes submitting financial statements, tax returns, reference letters, purchase contract, various disclosures. And all these things are reviewed by managing agents. And then by the board itself.

So you may also hear a second term called the sale application. Now these two often get used interchangeably, but there is a distinction. So the sales application refers specifically to the situation where somebody is selling their shares to a new purchaser, right?

So they’re moving out, they’ve got a real estate agent who’s found a brand new purchaser, and here we have a sale application. Okay? A transfer application is more broad.

It can also apply to sublets, gifting shares to a family member, like the example that I gave earlier, estate transfers or even refinancing your loan. Okay? So all these would be a transfer application.

You’re always going to have to go through the co-op, the board, the management to do these things. Anytime the board needs to approve a change involving the shares of the co-op or the proprietary lease. So while every single sale triggers a transfer application, it’s not the case in a transfer application.鈥�

鈥淪o the lender is securing the collateral, so the money that they gave against the stock and lease. So they sort of also have to approve that there is a new incoming person. But again, the good news is that the current shareholder will remain on the mortgage note.

So the lenders are usually favorable and approve the new incoming beneficiary, as we have been calling this new owner. So lenders are more favorable approving new owners. And it’s usually a smooth process.鈥�
鈥淭he way it’s done, that you have to contact the current lender of the shareholder and request an application for a mortgage modification. A mortgage modification will require the new person who will be added to the stock and lease to provide a financial information, anything that’s required by the lender. Once that has been submitted and reviewed by the lender and the board approved the new shareholder to be added to the lease and stock, once you provide the board approval letter, then usually the mortgage modification is granted, and the stock and lease can be changed, and the new shareholder can be added as a joint tenant with rights of survivorship to the existing stock and lease.

So that’s the little curve ball that also needs to be done, in addition to be added to the stock and lease.鈥�

鈥淎ll right, sounds good, I mean, it’s definitely something that people want to consider. So Bracha, let me ask you, do you feel like this is a solution for everyone? I mean, you have a lot of experience seeing things that go into probate, and how to avoid that.

Have we covered it?

Can this go for everyone?

Well, my approach is always to look at specific family situations and tailor the planning. So this is really good for family, like the example you gave, where there is one child. That example had an adult daughter, right?

Because we don’t like leaving things outright to minors. We’re assuming that adult daughter isn’t receiving any government benefits that this outright inheritance would endanger. We’re assuming that adult daughter is going to have kind of common sense and the ability to hire a lawyer and a broker, and maybe not be a spendthrift and waste the proceeds from the sale.

Otherwise, we might want to look at a trust for somebody who is not fitting into this very specific box that I’m talking about.鈥�

鈥淢akes sense. Makes sense. And I guess if there’s other children to consider or situations where there could be like family disputes, then maybe there’s another way to go to, right?

Yeah. Well, when there’s more than one child, A, you have the potential for disputes, but B, you know, this is a nice planning technique, but it doesn’t do the same thing as a will usually does, which says, I have child A and child B, but if either of them pass before me, I want their share to go to their kids. This doesn’t do that.

If one of your children passes before you and you have two kids on the release, it’s just going to go to the surviving child, and that’s not the outcome most people want.

That’s a really good example, Bracha.

Thank you.

Orsolya, how long does this process usually take and what does it cost?

Okay.

Approximately. I know you’re not going to give us any real numbers, but what’s involved here? Okay.

The process might be daunting, but believe me, it’s done very often. So here is an answer to your question in terms of timeline. It depends how quickly your management, your call board, how quickly they are responding to any kind of requests.

Some call boards are faster, some others are slower. I would say the moment you submit an application for a transfer of ownership or modification on your stock and lease, once you submit that application, usually management takes two weeks to review, then another four to six weeks, still the board reviews it, conducts the interview with the incoming new shareholder. So about six, seven weeks, six to eight weeks, let’s put it at six to eight weeks.鈥�

鈥淎t the same time, you can simultaneously run the process with the existing lender, which process should not prolong the six to eight weeks. But again, these are timelines given to you as an estimate, and it very much depends on the building board and management. In terms of costs, for example, many real estate attorneys will be working on a flat rate, because we understand the process, we know how to run the process.

But in addition to that, there will be very often, not always, application fees with your co-op board, the same as a sales application, which might be a couple of hundred dollars, again, as much as the board is charging. There might be some fees involved if there is a lender. Obviously, if there is no lender, then there are no fees.鈥�

鈥淎gain, think about application, although it’s just a modification of the mortgage modification. Again, there might be some fees, which are going at the end, add up. But at the end of the day, you will save a significant amount of money because going through probate may cost just as much or even more than adding someone on the lease.

But you definitely save time.

Sounds good. Well, I hope that this episode was helpful to all our listeners. We thank you so much for listening and joining us.

And we also thank our special guest today, Bracha Etengoff. And like I said, her information will be on the website. And so always reach out, leave a comment if you have any questions.

And we thank you so much again. We’ll see you next time on the next episode of Rock the Closing.

Thank you for tuning in to Rock the Closing. This podcast is hosted by real estate attorneys who offer valuable insights. Please remember that the content is for educational purposes only and does not constitute legal advice.鈥�

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