Is an LLc the best way to handle condo-related settlement money?
August 6, 2021 1:14 AM   Subscribe

What kind of bank account should we set up to for settlement money received after a lawsuit involving our condo?

My partner and I were Plaintiffs in a case against a developer who wanted to put up a building on property not zoned for it right next door to several condo units where we live. The settlement money that resulted has been parked in an IOLTA at our lawyer’s who wants it gone.

We would like to use this money for capital expenses to benefit all the condos since other owners put up money for the legal fund as well, now repaid to them. (Our own developer still administers our condo trust. They were not part of the lawsuit in any way, so we don't want to put the settlement money with them. Eventually when our development is finished, we will move remaining settlement money into an HOA reserve, but that’s a few years off. In the meantime, we have capital expenses facing us for which all owners would normally be assessed. With the settlement money, we could reduce such assessments.)

What kind of legal structure/bank account should we set up to keep control over this money after it leaves the IOLTA? We’ve asked another condo owner to be on this account with us though my partner and I will probably have to pay taxes on the money. Is an LLc the way to go so we and the other condo owner retain control of this money until it eventually goes into an HOA reserve? We will be contacting our CPA for advice, but we want to know what possibilities are out there for handling this money under the circumstances I describe.
posted by anonymous to Law & Government (4 answers total)
shouldn't your lawyer tell you what to do?
posted by JPD at 6:24 AM on August 6, 2021 [7 favorites]

The point of an LLC is to limit liability. Your lawyer should be able to tell you if that's relevant for your purposes.

It sounds like you and your partner are the sole legal owners of this money, and it doesn't have any other strings attached to it by the settlement, right? If that's the case, why not just make a new account for it under your names? That way, you retain control over it, and you're free to spend it on whatever capital improvements you like. Your CPA will know how to classify your expenditures (e.g., are they gifts? is the condo legal entity a non-profit? etc.)
posted by qxntpqbbbqxl at 9:57 AM on August 6, 2021 [2 favorites]

Is there a reason you don't just want to distribute this right back to the owners? Presumably you can use the assessment formula for this but in reverse, since you'd be using the money to reduce assessments in any event.

Any kind of corporate entity you'd create would have to have owners and a partnership agreement and so forth; I don't know how much money you're talking about but you could potentially spend a bunch of that on it. There are also various continuing legal requirements for LLCs that vary state to state around having regular filings, meeting minutes, etc., that are usually pretty easy when you have a single-owner LLC but that can get complicated when you have multiple owners.

I guess ultimately what I'm saying is:
- No matter how you decide to store or use the money, at some point you will have to decide who gets how much of it;
- If you can do that, you can just distribute it on that same basis.
posted by goingonit at 11:23 AM on August 6, 2021

You need to talk to a tax attorney in your state. Where I am, HOAs are typically set up as mutual benefit, non-profit corporations. Usually the condo developer sets one up, then the resident board takes over its operation. But you could set up another one for a similar purpose, with either the same or different governance. That would give you a place to put the money, and homeowners could control what to spend it on.

I don't know what the tax treatment for settlement proceeds is -- it probably depends on the settlement agreement and which state you're in. Again, a tax attorney can help you sort that out.
posted by spacewrench at 12:46 PM on August 6, 2021 [1 favorite]

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