A living trust does not protect the trust owner from levy or garnishment. Living trusts can be modified, revoked or amended by the grantor of the trust at any time and the living trust grantor has unrestricted access to the trust funds and can use them for any purpose.
Lawyers that draft living trusts often add a paragraph to the trust agreement called “spendthrift” language to prevent the trust property from pledge or attachment. The use of “attachment” refers to levy or garnishment, but this language cannot apply by law if the person levied is the trust owner. Living trust is a common term for a revocable grantor trust or inter-vivos trust and even though the funds are in trust, the trust grantor is the owner of the trust property for tax and legal issues.
The United States Code that governs the Internal Revenue Service states that any grantor who may have beneficial enjoyment of the trust funds is the owner. One of the most common levies or garnishments is for income tax purposes, and since the grantor of a living trust is the owner under Internal Revenue Code rules, levy or garnishment can attach by the Internal Revenue Service without court proceedings.
Child Support, Alimony and Other Creditors
If a trust grantor is in arrears with court-ordered child support or alimony, living trust levy can easily occur. The living trust grantor as an individual has the court-ordered obligation to pay child support or alimony, and is the legal owner of assets available to make these payments. For creditors other than taxes, alimony or child support, levy is not as easy for the creditor to achieve as court proceedings must commence. In these cases, settlement of a specific dollar amount usually occurs rather than an actual levy or garnishment.
Notice of Levy
When an independent trustee of a living trust or the bank that holds living trust assets receives a notice of levy, immediate action occurs. It is prudent for a living trust grantor to engage legal counsel as soon as the threat of levy or garnishment occurs to protect the rights of the grantor and the living trust.