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Can a Bank Freeze a Revocable Trust Account?

One method of securing payment for a debt is for the creditor to freeze the debtor’s bank accounts. If the debtor created or benefits from a trust, the trust’s bank accounts may be something that the debtor tries to seize. In many cases the debtor would be able to freeze the trust’s accounts. However, if the trust has a spendthrift provision and the debtor is a beneficiary, then the creditor would generally be unable to freeze the trust’s bank account.

  1. Trust Defined

    • Trusts are legal devices used by settlors, who transfer their property for the benefit of another, by placing it under the control of a trustee. The trustee manages the property to ensure it's properly maintained and distributed according to the settlor’s wishes. A trust is defined by the law of the state where it's located. As of January 2012, the Uniform Trust Code (UTC) has been adopted by 23 states, is being considered by two others -- and has been endorsed by the American Bar Association, making the UTC the best basis for general discussions on trusts.

    Revocable Trust Defined

    • A revocable trust is a living trust that's modified or revoked by the original creator without having to obtain the beneficiaries’ consent. A living trust is one established during the original donor’s lifetime. It's normally created to ensure the underlying property is smoothly transferred to beneficiaries upon the donor’s death.

    Frozen Bank Account Defined

    • When a creditor has a debt, she can go to court and get a judgment entered that will allow her to obtain the funds through a variety of methods. One of the methods includes freezing the debtor’s bank accounts. A bank account is frozen when the court orders the bank to not allow the account holder to withdraw funds. The creditor must inform the debtor of the liability, but does not have to tell the debtor that his account is being frozen. Once the account is frozen, the creditor can take the contents of the account to satisfy the debt.

    Freezing Revocable Trust Accounts

    • To determine whether a revocable trust account can be frozen, you need to establish whether a judgment creditor can “reach” a trust’s assets. Creditors of the settlor are legally able to claim the assets of a revocable trust to settle the underlying debt, and thus can obtain the judgment necessary to freeze the trust’s bank account. Creditors of the beneficiary can only obtain a judgment to freeze the trust account if the trust lacks a spendthrift provision, but only to the extent of the debtor beneficiary’s rights to the trust. So, if there are two beneficiaries to the trust, a court may freeze the account for the debtor but not for the other beneficiary.

    Spendthrift Clause

    • A spendthrift clause prevents the beneficiary from selling her interest in a trust, or from a creditor seizing her interest in the trust to satisfy a debt. The only proceeds a beneficiary will receive from a trust with a spendthrift clause are whatever is provided for in the trust account, but those amounts are guaranteed regardless of the beneficiary’s debts. The exceptions to a spendthrift clause are if the beneficiary creditor is trying to collect child support or maintenance, the underlying debt derives from a service related to the maintenance of the trust or if there is a federal or state law that overrules the protection of the spendthrift provision.

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