“The key to any kind of asset protection planning, is that it must take place well before the need to be protected arises.”
The owner of a California townhouse in a homeowner’s association should examine his or her escrow documents, title report, property deed and the association’s governing documents, rather than relying just on the physical appearance of the property to know exactly what type of property was purchased. This is according to a recent article in The Los Angeles Times, “Trusts aren't a surefire way of making your HOA property judgment-proof.” The owner might want also to ask about placing real estate assets into a family trust to protect against future lawsuits with the HOA.
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.
When folks talk about a “family trust” or “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.
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.
While there is no foolproof way to protect residential deed-restricted property from litigation with an HOA, especially property that is rich in equity, the key to any asset protection planning is to do this long before the need to be protected arises.
Reference: Los Angeles Times (February 4, 2017) “Trusts aren't a surefire way of making your HOA property judgment-proof”