Whether you are attempting to protect a townhouse in a condo development or a detached single-family home in a planned community governed by a HOA, you’ll need to know what the rules are before putting either home in a trust.
Whenever a home is part of a community with a HOA, determining how the home is owned requires a thorough examination of escrow documents, the title report, a deed to the property and the governing documents from the HOA itself. The style of the house or even of the community has no bearing on the legal ownership, as reported in The Los Angeles Times, “Trusts aren't a surefire way of making your HOA property judgment-proof.” One important point to keep in mind: regardless of how you decide to protect the asset against possible lawsuits from the HOA itself or an aggrieved neighbor, take action long before anything occurs.
There are several legal distinctions between condominiums and Planned Unit Developments (PUDS)—the ownership of common areas is one of the most cited. However, whether a townhouse or a single-family dwelling is part of a PUD or condo development, both are deed-restricted properties subject to homeowner associations regulated by California’s Davis–Stirling Common Interest Development Act in the California Civil Code. A power reserved for the board of all common interest developments is the right to place a lien on the property of an owner who violates the covenants or fails to pay on some association-related debt. The lien lets the board foreclose on and take that property to satisfy the debt.
This is tough for estate planning, because if a lien is applied to the property and the owner passes away, the estate can be attached. This keeps the property from passing to the owner’s heirs until any outstanding debts are paid.
Unfortunately, the most commonly used trusts won’t protect these assets.
Revocable Trusts
When folks talk about a “living trust,” they usually mean a “revocable trust.” This is where the grantors maintain ownership and control over their property during their lives. At death, the control goes to a trustee who then further administers or distributes the assets without having to go through probate. These trusts are “revocable” because the grantors can make changes to the terms, distribute assets early, and even revoke the whole deal. However, the assets in the trust are still subject to taxes and are not protected from creditors, litigation or foreclosure both during the lifetime and after the grantor’s death.
Irrevocable Trusts
By contrast, irrevocable trusts provide the creditor protection to the grantors, but only if they’re created for legitimate estate planning purposes. However, in an irrevocable trust, the grantors give up control over the assets placed in that trust—they can’t amend nor revoke the trust during their lifetimes. When the trust is created, the grantors must choose who they want to have their property when they die. That decision can’t typically be changed, and real property can be difficult or impossible to sell or refinance while it’s in the trust.
There is no way to completely protect residential deed-restriction property from litigation with an HOA, but any kind of property needs to have “loss assessment” coverage and a very large umbrella or catastrophe insurance policy as part of your personal homeowners insurance package. If you haven’t done so already, make sure to put all of this protection in place as soon as possible and don’t wait until an incident occurs.
Reference: Los Angeles Times (February 4, 2017) “Trusts aren't a surefire way of making your HOA property judgment-proof”