Fish or Fowl2/6/19 | By: David I. Faust, Esq.| GDB 2019 Winter Newsletter
Whether shares representing ownership of a cooperative apartment are real property or personal property has perplexed estate lawyers and their clients, especially when the owner/decedent is a non-domiciliary of New York. Is succession of the shares governed by the laws of New York, where the co-op is located – the case if the shares are realty – or the laws of the domicile of the decedent? If there is no will, or if a spouse elects against the will, which law applies?
A recent Supreme Court, New York County, case sheds some, albeit dim, light on this question.
The case involved an attempt to foreclose a judgment against two commercial coops owned by the judgment debtor and his wife. The wife was not liable on the judgment. If the shares were held to be personal property, they would be owned in a “tenancy in common,” which means that the judgment debtor could force the sale of the shares and apply the husband’s portion in satisfaction of the judgment against him. If the shares were deemed to be real estate, they would be held as “tenants by the entirety,” not subject to partition and not subject to forfeiture, in whole or in part, for the debts of one but not of both of the owners.
Relying on a 1977 Court of Appeals case involving a tax lien, and acknowledging that coop shares do not fit neatly into traditional classifications, the New York County Supreme Court reasoned that the interests of the judgment creditor in the coop shares – seeking money to satisfy a judgment – fit more within the realm of a claim against personal property than against real estate. This is the same rule that applies when banks lend money secured by shares representing ownership of coop units in New York; they do not get a mortgage on the unit. Instead, they get a security interest because the coop shares are treated as personal property. One wonders if the result would have been different if the judgment creditor were seeking partition and possession of any of the real estate subject to the proprietary lease which accompanied the coop shares.
This is a matter of state law. In Connecticut, coop shares are treated as real estate and are mortgaged the same as any other real property. The New York decision did not refer to the fact that shares in a coop are inseparably linked to a proprietary lease for a specific coop unit, which lease is an interest in real estate.
In the estate context, particularly where there are multiple heirs, the objective is typically to sell the coop and distribute the proceeds rather than to obtain possession or the right to occupy the coop unit. Under the analysis of the recent decision, this would tend to make the shares personalty, whether the claim of an heir arises under a will, a spousal election or the laws of intestacy. The result might be different if an heir sought possession and use of the underlying real estate, subject to the rules, requirements and restrictions of the coop corporation.
The difference between shares regarding ownership of a coop unit being considered as real or personal property is of particular importance to a non-resident alien owner. Whether considered real or personal property, coop shares are U.S. assets for federal estate tax purposes and, therefore, are subject to estate tax if owned by a foreign decedent. If they are deemed to be real estate, they may also be subject to a federal gift tax if gifted by a non-resident alien … but if deemed to be personal property, they are intangible and therefore would not be subject to U.S. gift tax. This means that the shares could be gifted during life without a transfer tax that would be due on a testamentary disposition.