October 20, An important estate planning goal of yours may be to ensure that your money and other property ultimately pass to your heirs rather than to your creditors. One common estate planning tool used for this purpose is a trust. Essentially, a trust is a legal arrangement under which the creator often called a grantor or settlor transfers ownership of assets into the care of another person the trustee to be administered for the benefit of another person or group of people the beneficiaries.
The document that establishes the responsibilities of the trustee and the rights of the beneficiaries is called the trust instrument, trust agreement, or simply the trust. Updated on October 30, If the beneficiary is a bad money manager, the trust keeps him on a strict budget and keeps the assets away from his creditors. It doesn't keep them away from the IRS, though; courts have ruled that if the beneficiary doesn't pay his taxes, the IRS can go after the trust assets.
The same rule applies to beneficiaries of regular living or irrevocable trusts. A graduate of Oberlin College, Fraser Sherman began writing in Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history.
By Fraser Sherman Updated April 18, Whether a judgment lien can be placed on an asset in a living trust depends upon whether the judgment is against a grantor or a beneficiary. Once a judgment is entered against a grantor, the judgment creditor may place a lien on the grantor's property, regardless of whether it is in a trust.
This includes real estate and personal property. With an irrevocable trust, state law may protect trust assets from judgment liens against a grantor. Generally, if a judgment is against a beneficiary, a lien may not be placed against the assets of a living trust, because a beneficiary does not have an ownership interest in trust assets. However, once any trust funds are distributed to the beneficiary, the creditor can go after those funds.
This is a lien by a government authority to secure the payment of past-due taxes. If property taxes are not paid, a lien may be placed on the property, regardless of whether it is in a trust. If a grantor owes money for delinquent income taxes, the IRS, state, or local taxing authority can place a tax lien on trust assets.
When a beneficiary owes delinquent taxes, if state law allows, a tax lien may be placed on trust assets only to the extent of a distribution that the trust requires the trustee to make to the beneficiary. If a grantor receives Medicaid benefits, the state may place a lien on trust property to secure recovery of those benefits. However, assets in an irrevocable trust are not subject to a Medicaid lien.
A living trust provides very little protection against liens. There are other ways to protect assets as part of your overall estate plan, either separately or in conjunction with a trust.
This portion of the site is for informational purposes only. The content is not legal advice. Assets placed in a living trust are not protected from a lien placed against a beneficiary of that trust.
However, the trustee is not obliged to make a premature distribution of assets to the beneficiary to satisfy a judgment. It may be possible to protect certain assets in a trust from a lien if they are sold to or placed in a limited liability corporation, or LLC, that is owned by the trust and not the grantor or trustee. Depending on the type of property, however, this may not be advantageous. For example, the sale or transfer of real property that is subject to a mortgage will usually accelerate demand to satisfy full payment of the note at the time of the sale.
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