New Opportunities for Ownership of Co-op Apartments by Family Limited Partnerships & Trusts

Many residential apartments are owned by cooperative corporations (“co-ops”).  In New York City, it has been estimated the coop apartments outnumber condominium apartments by three to one.  The boards of directors of co-ops have been known to be especially and unreasonably restrictive as to who they will admit as shareholders and residents, and many boards, especially in New York, have acquired reputations of being “snooty” and exclusive.  The pop singer Madonna was famously rejected by the co-op board of a very expensive Park Avenue building.

The Wall Street Journal reports (“Co-ops Get Competitive”, August 29, 2013, page A-17) that the boards of cooperative apartments are now relaxing their policies and acceptance criteria in order to appeal to younger buyers, as well as to foreign buyers, who are not willing to put up with onerous admission requirements and unreasonable restrictions.  These co-op boards are changing their policies in order to be competitive with condominiums and in order to attract new investment and new buyers.

What does this have to do with asset protection and tax minimization?

First, one’s home, whether a co-op, condo, house or otherwise, is normally a very significant asset and should be protected from future claims.

As the Wall Street Journal points out, “while buyers have always been able to buy condos and townhouses anonymously under corporations and trusts, now even some Fifth Avenue [co-op] boards have let brokers know that they would now consider purchases done in the names of trusts or limited liability companies . . . .”  And, we would expect, in the names of family limited partnerships (FLPs), which are similar to limited liability companies (LLCs) but offer better asset protection.  Thus, ownership of a co-op by an FLP is advisable if allowed by the co-op board.

Second, as noted above, co-op boards are positioning themselves to take advantage of the healthy demand by wealthy foreign buyers for U.S. real estate.  As the Wall Street Journal reported, co-op boards have clarified their rules, and made “it clear that international buyers, who are active in the condo market, were welcome” at co-ops as well.  We have written before about the appeal of U.S. real estate, especially expensive apartments, to wealthy foreign buyers.  We have also discussed how, through the use of certain hybrid trusts, foreign buyers can minimize their exposure to the Foreign Investment in Real Property Tax Act (“FIRPTA”), which imposes an onerous 10% tax on the gross sale proceeds when a foreign owner sells U.S. real estate.  Please see our article, How Foreign Purchasers of U.S. Real Estate Can Save Significant Taxes.

As co-ops attract new buyers, domestic and foreign, it is important to consider the best form of ownership of real estate.  Ownership in entities such as FLPs and trusts may offer significant asset protection and tax benefits.  Please contact us for additional information.

Is New York Targeting Non-Compliant Offshore Accounts?

Is New York Targeting Non-Compliant Offshore Accounts?
by Asher Rubinstein

The Wall Street Journal this past weekend ran an article about Cyrus Vance, Jr., the new Manhattan District Attorney. See “The World’s District Attorney, Part II“, Wall Street Journal, February 20, 2010.

The Journal reported that the Manhattan DA will be prosecuting cases related to undeclared offshore accounts. The following single sentence appeared on its own, and without any sources cited: “Federal prosecutors can’t handle all of the cases, so they have handed some of them to Mr. Vance’s office.”

That revelation, alone and without authority, is very curious. The Journal, of course, is normally quite thorough, but that bombshell of an announcement calls for more explanation and detail. Is this a conclusion reached by the Journal reporter? Was this information obtained from a source at the IRS?

It is doubtful that the IRS would publicize that it lacks the resources to go after every non-compliant offshore account holder. The IRS does not want to give the impression that someone might squeak by. For instance, the Annex to the UBS settlement agreement, the one which listed the numeric criteria for disclosure of the UBS accounts, was delayed in release because the IRS did not want an account holder to think that because he or she was below a certain dollar threshold, he or she was “safe”. The delay in the release of that criteria contributed to a fear of prosecution, and that fear resulted in thousands of voluntary disclosures. Had the criteria been announced earlier, taxpayers may have felt that their accounts were under the threshold, and they may not have come forward. Now, publicizing that the IRS lacks the ability to target all non-compliant account holders undercuts the IRS’ past goal of scaring taxpayers into compliance.

In addition, the comment that the IRS lacks the resources to prosecute all offshore account holders may also seem surprising in light of the latest guilty plea, i.e., Silva, the first non-UBS client to be prosecuted, whose account at HSBC was valued at $250,000. With limited resources, is it curious that the IRS would chose Silva’s account rather than one containing a higher balance?

Actually, no. The IRS wants taxpayers with non-compliant accounts to be on guard, whether the account contains $100,000 or $100 million. Again, the IRS doesn’t want a taxpayer to think that he or she might squeak by with a smaller account.

Given the cooperation between the IRS and State tax authorities, it’s no wonder that New York residents with non-compliant foreign accounts face prosecution on both a federal and state level.

In the context of the New Jersey Voluntary Compliance Initiative, the information-sharing between Federal and State was publicized and caused many NJ residents to come forward under both programs, the IRS Voluntary Disclosure Program as well as New Jersey’s amnesty program.

In light of the information sharing between the IRS and state tax authorities, it would be foolish to think that one’s offshore account could remain hidden from both levels of government.

The lesson is to bring a non-compliant foreign account into tax compliance with respect to all taxing authorities, state and federal.

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