What Community Associations Need to Know About Units Owned by a Trust
Trusts are a popular estate planning tool to help individuals accomplish their personal and financial objectives, including providing for loved ones and minimizing personal liability. Given these potential benefits, individuals may choose to purchase a condominium unit via a trust, meaning that the trust is the official record owner of the unit. While it is relatively common for a unit to be owned by a trust, this form of ownership may cause confusion for community associations.
As part of our ongoing efforts to proactively educate our clients to prevent legal issues from arising, LP’s Community Association Group has partnered with our highly recognized Trusts & Estates Group to consider the legal issues that our association clients may encounter when a unit is owned by a trust and provide practical guidance to address these issues. Below you will find practical general guidance for community associations related to trust-owned units.
What Exactly Is a “Trust”?
A trust is a non-human, legal entity that allows one party (the trustee) to hold property for the benefit of another party (the beneficiary). Trusts are created via a legal document sometimes referred to as a “trust agreement” or “declaration of trust”. There are many different forms of trust and specific requirements for establishing trusts.
- Pro Tip: It is a recommended best practice that individuals who wish to create a trust work with qualified legal counsel with expertise in trust planning to ensure that the trust is properly established and is in accordance with their objectives.
How Can I Confirm a Unit is Owned by a Trust?
Check the most recent deed for the unit. A deed is an official legal document that establishes ownership of real property, including a condominium or community association unit. To obtain a copy of the deed, ask the resident of the unit or contact point for the trust. Alternatively, recorded unit deeds may be obtained from the Recorder of Deeds for the county in which the building is located.
- Pro Tip: Only use the current deed to confirm that a unit is indeed owned by a trust as this is the official record for ownership of the unit. Other documents related to the unit, such as the contract of sale or closing statement, should not be used to confirm ownership as there is no guarantee that the owner listed on these documents is the same as is listed on the current deed.
I Confirmed the Unit Is Owned by a Trust – Who Can Act on Behalf of the Trust?
The only person that has legal authority to act on behalf of a trust is the trustee. In some cases, but not all, the creator of the trust (often formally referred to the “grantor” or “testator”) is also the trustee. One should never assume that the person who created the trust or is residing in the unit is the same person who has authority to act on behalf of the trust. Similarly, one should never assume that the person residing in a trust-owned unit is authorized to act on behalf of the trust. Here are a couple of examples of situations where the resident of a trust-owned unit may not be authorized to act on behalf of the trust: (1) when a parent wishes to ensure their unfledged child has appropriate housing but without giving such child ownership of the unit; and (2) when a deceased individual wishes to allow a (former) romantic partner to continue to reside in a unit, while ensuring the deceased individual’s children ultimately inherit the unit upon the romantic partner’s death.
To confirm the identity of the trustee authorized to act on behalf of a trust, either (a) check the trust document and any amendments (or the most recent trustee designation for the trust); or (b) request and review a “Certification of Trust”, which discloses the key information relevant for you to ensure you are interacting with the correct party, and that said party has the power under the trust agreement to take the actions contemplated. Confirming the identity of the trustee is strongly recommended to ensure you are dealing with the correct individual with authority to act on behalf of the trust and to mitigate potential liability.
Note: Although not common, a more complicated form of trust is called a “directed trust”. In basic terms, a directed trust is a type of trust in which there is a third party designated to direct the trustee how and when to act as it relates to certain matters or assets. When you face a “directed trust” situation, the most prudent course of action is to request a confirmation in writing from the trustee that the directing party has authority to act on behalf of the trust. A directed trust situation that may arise in the community association context is when a bank is acting as the trustee of a trust, but a friend or family member is acting as the directing party as it relates to any residential real estate owned by the trust.
- Pro Tip: Check the trust document or Certification of Trust to confirm the identity of the trustee who is authorized to act on behalf of the trust.
For a Trust-Owned Unit, Who Can Run for the Board?
Only unit owners are eligible to run for community association boards. However, for units owned by a trust or other non-human legal entity, the association’s by-laws will customarily designate certain individuals that are eligible to run for the board on the unit owner-entity’s behalf. For example, the by-laws may provide that the trust beneficiary or an agent of the trust is eligible to run for the board. Be sure to check the association’s by-laws to confirm who may run for the board on behalf of a trust-owned unit.
- Pro Tip: It is a recommended best practice to have the association’s legal counsel confirm that all candidates, including candidates for trust-owned units, are eligible to run for the board.
What Does the Trust Title Tell you?
Nothing, other than the name of the trust. There is no legal requirement that a trust title correlate with the terms of the trust. For example, the “Suzy Smith Revocable Trust” may not be for the benefit of Suzy Smith and it may not be revocable. The adage “don’t judge a book by its cover” also applies to trusts: never make any assumptions about a trust based on its title.
- Pro Tip: Do not rely on the trust title to confirm the trustee or beneficiary of the trust.
Who Should You Take Direction from When There Are Multiple Trustees?
It depends. Some trusts are drafted so that if there are multiple co-trustees acting, any one of the trustees can act independent of the other to bind the trust. The more common approach is that a majority of the then-acting co-trustees must agree to an action in order for such action to be binding. Check the terms of the trust document to confirm who is authorized to act on behalf of the trust where there are multiple trustees.
- Pro Tip: If there are multiple trustees, it is a recommended best practice to have the association’s legal counsel review and confirm who may act on behalf of the trust.
While trusts are relatively common in an estate planning context, community association board members and management (if professionally managed) may be unfamiliar with the concept of a trust or the nuances posed when a unit is owned by a trust. The above primer is intended as a starting point to help community association boards and management better understand and successfully navigate issued raised when a unit is owned by a trust.