The Perils and Pitfalls of Owning a Co-op
We have all heard a horror story or two about co-op ownership. These stories usually arise out of actions or inactions taken by the Board of Directors (“Board”). For instance, a Board might implement a policy requiring a percentage of the floor to be carpeted. Some Boards have reputations of rejecting applicants who desire to purchase a unit without a satisfactory explanation. Unknown to many, however, are the dire consequences that follow when a Board does not allow one to transfer their co-op to a trust.
Assume for a moment that you require long-term care, whether home care or nursing home care, and that you apply for Medicaid to cover the cost of your care. Further assume that you own a co-op as your primary residence. For Medicaid eligibility purposes, your primary residence is considered an exempt asset. That means that Medicaid cannot force you to sell your co-op or count the value of your co-op when determining eligibility. Moreover, unlike a house, which is considered real property, the law does not allow Medicaid to place a lien against your co-op. Medicaid can, however, file a claim against your estate upon your death in order to recoup any benefits paid on your behalf. But Medicaid can only file a claim against your “probate estate”.
Your probate estate consists of assets in your individual name (no beneficiary or joint owner) that pass under the terms of your Last Will and Testament. By way of example, if you own a co-op in your individual name and your Last Will and Testament leaves your co-op to your children, your probate estate includes your co-op. Whoever you have nominated to act as your Executor must probate your Will by going through a process in the Surrogate’s Court. Once that process is commenced, Medicaid might file their claim, which could exceed the value of your co-op.
In recent years, Medicaid has become more aggressive in pursuing estate recoveries, thereby causing elder law attorneys to implement techniques to avoid estate recovery. A common technique is to transfer the co-op to a trust since assets in trusts do not have to go through probate. Thus, by using a trust, you avoid probate, and by avoiding probate, there is no probate estate. Thus, you have defeated any Medicaid claim.
Enter stage right – the co-op Board. If you own a co-op in the geographic area that that this article reaches, there is a 50% chance that your Board does not allow transfers to trusts. This policy is detrimental to your estate and long-term care planning because, as noted above, it could result in the loss of your co-op after your death. Sadly, many Boards who do not allow transfers to trusts simply do so out of lack of understanding. In fact, I have had the opportunity to present to several Boards at their monthly meetings and after doing so, Boards have agreed to allow such transfers.
If you already own a co-op, it is important that you implement proper estate planning using trusts and other documents to preserve your estate if you fall ill. Prior to drafting a trust, you will need to find out if your Board allows transfers to trusts.
If you are someone who is looking to downsize and a co-op is within your sights, I hope this article brings insight into your decision-making process. You MUST find out if the Board allows transfers to trusts prior to entering into a contract to purchase the co-op. If you ignore this article, and the Board does not allow transfers, you may lose the value of your co-op.