Setting up revocable trust won’t protect homeowner from creditors
Question: I own a house and my mom owns a one-bedroom condo in the same homeowners association development. We want repairs made and we’re frightened because our board directors constantly threaten owners; if we violate any of their rules or governing documents they’ll fine and then sue us. Those threats are reduced to writing by the board’s voracious attorney, who threatens to send us invoices for legal fees. Our properties are not in trusts and we’re unsure how to proceed. What are the costs of setting up a trust and will a trust protect us from litigation by the association? Can we withhold dues for the association’s failure to repair? If we default on our association-related payments, will a trust protect us from foreclosure and collection efforts?
Answer: Owners are sometimes under a mistaken belief that because the association has failed to make repairs or they object to fines, fees or penalties levied against them, they are entitled to withhold payments. The obligation to pay association assessments is independent from the association’s obligation to repair or levy fines. The association’s failure to perform repairs does not excuse owners from their obligations to pay assessments. A board’s due diligence should include examining methods used by the association to levy and collect assessments, fines and penalties, as it relates to compliance with state and federal laws such as the Fair Debt Collection Practices Act and California Rosenthal Fair Debt Collection Practices Act. Penalties can be imposed for debt collection practices that violate these laws.
While associations may collect late fees, penalties and fines, such items need to be rationally related to the violation. Otherwise the association could be guilty of making a profit and could jeopardize its tax-exempt status. Even nonsensical late fees, penalties and fines carry with them provisions for attorney’s fees. Unfortunately this creates a built-in incentive for an out-of-control attorney to pursue groundless or trivial violations to collect fees. There are more owners than directors. Get a new board elected and terminate the attorney.
A trust can be created for any type of property ownership, including those located in a common interest development. It is one part of estate and asset protection planning.
There are revocable and irrevocable trusts. Most estate plans make use of a revocable trust because the trustor (the person setting up the trust) can amend or revoke the trust as well as add or remove property to and from the trust.
Revocable trusts do not provide the trustor with creditor protection. Irrevocable trusts, on the other hand, can provide the trustor with creditor protection, but only if they are created for legitimate estate planning purposes (not set up to defraud creditors). The downside to an irrevocable trust is that the trustor gives up control over the assets placed in that trust and can neither amend nor revoke it.
If either of you establish a revocable trust and transfer title to your residence — be it a single-family residence or condominium — into the name of your trust, the association could still recover compensation from the assets held in your trust.
By transferring title to your residence into the name of your revocable trust, you transfer your interest in the real property into your name as trustee of your trust. A trust transfer deed is then recorded through the county recorder’s office and can be located either by parcel number or your name. In California, you can create title-holding trusts that permit the owner’s name to be shielded from the public.
Creating and maintaining a revocable trust is not without expense. Attorney’s fees are charged for preparation, changes and updating your revocable trust documents. Attorney fees will also be incurred with regard to trust administration after death.
Some argue that having a revocable trust is more expensive than having a will that creates a trust upon death (called a “testamentary trust”). While setting up a testamentary trust may initially cost less than a revocable trust, one must consider the after-death costs of such a trust. A testamentary trust means your estate will be subject to probate. Such an estate is subject to an award of statutory fees both to the attorney who handles the probate and the executor of your estate. California’s statutory fees are calculated in accordance with Probate Code section 10810 and are based on the gross value of your estate, meaning that you don’t get to deduct any mortgages from the value of your real estate.
Trusts and estate planning in general should be treated as if time is of the essence. When deciding to set up a trust there are many things to consider, so it’s best to seek advice from an attorney experienced in estate planning. Referral services such as the California State Bar Assn. can provide help in finding an attorney.
This column was co-written by Joel J. Loquvam, an attorney who specializes in estate planning, probate and trust administration. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian JD, P.O. Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com.
