Can restrictions in a trust prevent asset seizure/confiscation of a beneficiary by creditors? Does it make a difference if the creditor is the government?
Simple trust: three equal beneficiaries, all married.
One beneficiary’s spouse had personal assets commingled with business assets, and the business was fined by the government for unpaid taxes. A lien was put on their jointly-owned house, which they eventually lost in a foreclosure.
When the assets in the trust are dispersed, can the payout be temporarily withheld from the beneficiary with the fined spouse? Can the government seize his portion of the inheritance?
2 Answers from Attorneys
The government's lien is mighty and powerful but only reaches assets or income owned by the delinquent taxpayer. If the beneficiary of the trust is not a debtor to the government, the beneficiary should make sure to keep the trust distribution proceeds separate and the government's lien will not reach the separate assets of the non-debtor spouse. A careful reading of the trust and a review of the beneficiary's marital and nonmarital assets income and debt would be required to answer this question with any authority.
You will want to have an estate planning attorney review the trust language and explain its terms for you. Some trusts allow the trustee to hold back funds in the event of certain detrimental situations that the beneficiary may find himself in so that the beneficiary's funds are protected to the greatest extent possible. Other trusts allow for liberal distributions to be made to the beneficiary which might also allow attachment by creditors.
If you are trying to protect the assets from a creditor of a spouse of the beneficiary, it may be easier than if the beneficiary himself/herself is the debtor.
Good luck to you.
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