Transferring a cooperative to an adult child, relative, or friend requires having cooperative shares reissued with all of the co-owners’ names on the shares. If the original owner becomes a co-owner, then his or name appears on the new shares together with the names of the new co-owners. This is a gift to the co-owners that is reportable to the IRS. Alternatives to making new co-owners during lifetime are to place the shares in a living trust that will provide them the shares as an inheritance, or to leave them as an inheritance under a will.
No matter what alternative is used, you must request permission of the cooperative board to transfer ownership. In general, the board requires financial information and interviews the new co-owner(s) to see if he or she is suitable to be an owner and a resident. The cooperative requires that a fee be paid for the transfer and that legal expenses be paid to the cooperative’s attorney. Usually, the cooperative requires the original owner's attorney to prepare a state tax form that must be filed even when the transfer is made as a gift. The City of New York requires a filing fee be paid. In my experience there can be a long delay between the application for approval and the cooperative’s decision. The cooperative may authorize co-ownership and deny permission for the new co- owner to live in the residence. The effect of this "split-decision" is to permit the new co-owner to sell the property, with approval of the board of the new purchaser.
Why transfer cooperative ownership directly?
The reason to transfer the ownership of the cooperative directly is to have certainty during one’s lifetime that the transfer has taken effect. While the cooperative approval process is required, there is no involvement of a court, or of a trustee of a trust. The value of having this certainty for the original owner to determine. A lawyer cannot quantify that value. On the other hand, a lawyer helps you see the cost of having this certainty.
Are there costs in transferring ownership directly rather than using the alternatives?
There are disadvantages to transferring ownership directly during lifetime. The first involves the capital gains tax, which now is about 23.8 percent of the difference between the basis (the cost of the cooperative, with adjustments) and the sale price. There is a step up in basis for inherited property to the fair market value at the date of death. Thus, when property is sold, the capital gains is based on the difference between that stepped up basis and the sale price. On the other hand, by making the heir a co-owner, the heir gets the original owner's cost, called “carryover basis.” Where the value of the cooperative has been increasing, as is the case with units that have been owned for years, this means a bigger capital gains tax payable to the IRS.
A second disadvantage is to delay eligibility for medicaid if this gift is made within five years of the medicaid application.
How do the alternatives of transferring title to a living trust or leaving the shares under a will compare?
The advantage of transferring title to a living trust is that on the death of the grantor the property can be transferred relatively seamlessly. The property is taken out of the probate process that requires court filings and court approval of an Executor to transfer title. It does not cause the basis/capital gains tax problem discussed above. However, the trust does not alter the fact that the the new owner can neither sell the unit or move in without permission of the cooperative board. Inheritance under the will depends upon court approval. This involves a filing fee, attorney’s fees for probating the will, and awaiting the court’s decision on a petition.
In conclusion, these factors should be considered when considering making a change in cooperative ownership to a related party.