As is often the case when it comes to the law, the answer to this question is “it depends.” If you have transferred your assets into a revocable trust, your creditors will typically be able to access those revocable trust assets to satisfy a judgment debt. However, if you have transferred your assets into an irrevocable trust or if you are the beneficiary of a trust, the answer can become a bit more convoluted.
What Trusts Are Protected From Creditors?
Trusts are simply contracts, meaning any type of trust construct can be created depending on your needs, and while some trusts may offer asset protection, others can be attacked by creditors to satisfy judgments against you for debts owed. Whether a creditor can take money from a trust largely depends on the nature of the trust, your relationship to it, and local laws.
What If I Am the Trust Creator?
If you are the trustmaker, also known as the “settlor” or “grantor,” it is essential to create an irrevocable trust if you want to protect the assets you place in the trust. Because revocable trusts can be terminated or modified at any time, your creditors will typically be able to reach the assets in an irrevocable trust since you normally, technically retain control over and benefit from them.
However, with irrevocable trusts, you often give up control over its assets and receive no benefit. In essence, legal title is effectively, and permanently, transferred to a third-party, here the trustee. This means that, in many situations, creditors can’t collect money from an irrevocable trust to cover your debts as the grantor.
What If I Am a Beneficiary?
If you are the beneficiary of an irrevocable trust, judgment creditors will not typically be able to take money directly from the trust. However, they usually can access distributions you receive from the trust. When family trusts include a “spendthrift clause,” which limits the amount of income the trustee can distribute to a beneficiary, it can help protect assets from creditors as long as they remain in the trust, except in some limited circumstances in some states.
Can Creditors Garnish a Trust?
Yes, judgment creditors may be able to garnish assets in some situations. However, the amount they can collect in California is limited to the distributions the debtor/beneficiary is entitled to receive from the trust.
Garnishment is a legal process that allows your judgment creditors to collect on the unpaid judgment by taking your money or property. And under California Probate Code 15306.5, a judgment creditor can petition the court to order the trustee to “satisfy all or part of the judgment out of the payments to which the beneficiary is entitled under the trust instrument or that the trustee, in the exercise of the trustee’s discretion, has determined or determines in the future to pay to the beneficiary.”
However, there are some limitations on the amount of money a creditor can collect through this statute. First, the trustee cannot be ordered to pay more than 25% of a payment that would otherwise be made to the beneficiary. Additionally, the court cannot order that the trustee pay any amount that is necessary to support the beneficiary and their dependents.
If your creditors are trying to take money from a trust, it’s essential that you contact an accomplished trust litigation attorney as soon as possible. As with most litigation involving trusts, determining whether a creditor can access trust property requires an in-depth analysis of the specific language of the trust and the relevant legal requirements. It’s essential to have an experienced professional handle your case if you want to protect your assets from creditors, or if you are attempting to secure payment of a debt or judgment from a trust.
Have questions? We’re happy to discuss.
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About RMO, LLP
RMO LLP serves clients in Los Angeles, Santa Monica, Ventura, Santa Barbara, San Francisco, Orange County, San Diego, Kansas City, Miami, and communities throughout California, Florida, Missouri, and Kansas. Our founder, Scott E. Rahn, has been named “Top 100 – Trust and Estate Litigation” by SuperLawyers, Trusts and Estates Litigator of the Year, and Best Lawyers in America for Litigation – Trusts and Estates. For a free consultation, call (424) 320-9444 or visit: https://rmolawyers.com.