Is Beneficiary of Irrevocable Trust Judgment Proof?
An irrevocable trust might protect the trust's assets from the beneficiary's creditors. However, an irrevocable trust in no way protects the beneficiary's other assets (those not related to the trust) from those who might win a judgment against a beneficiary. Those with questions about a specific irrevocable trust should seek legal advice.
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Irrevocable Trusts
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A trust takes assets from one party and places them in another party's hands. This second party, the trustee, then manages the assets and distributes them, as permitted by the trust, to one or more third parties, the beneficiaries. Trusts may be revocable, meaning that the original owner of the assets, the settlor, may choose to revoke the trust at any time during his life. An irrevocable trust is not absolutely irrevocable; the title refers to the fact that a settlor usually can't revoke an irrevocable trust on his own. He must get consent from other interested parties, typically the beneficiaries, and perhaps a court.
Asset Protection
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Settlors can use a trust to shield their assets from existing or potential creditors. By transferring the assets into the trust, the settlor relinquishes all legal control and ownership of those assets. Trust assets are technically owned by the trustee, and so usually those assets remain out of the settlor's reach. If the trust stipulates how and when a trustee may distribute trust assets to the beneficiaries, the trustee must follow those instructions. If the trust is not explicit, then the trustee has great discretion regarding distributions. Because the decision about distributing assets is in the trustee's hands, not those of the beneficiaries, these trusts typically protect the assets from the beneficiary's creditors, including judgment creditors. Such protection extends until the point at which the trustee distributes the assets to the beneficiaries.
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Beneficiary's Creditors
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In asset protection trusts, also known as spendthrift trusts, the trust explicitly states that the beneficiary may not transfer his interest. This prohibition on transfer applies to both voluntarily transfers, such as a sale, and involuntary transfers, such as a forced transfer by a court to satisfy a claim by a creditor. Most states allow these restrictions. However, some jurisdictions limit the asset protection to the amount of distributions that a beneficiary requires to meet his living needs (clothing, food, medical care, etc.) In these jurisdictions, any amount that exceeds these daily needs may be vulnerable to creditors.
Preferred Creditors
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In many jurisdictions, certain types of creditors can still reach any amount distributed to the beneficiary. Typically, such "preferred creditors" include parties to whom the beneficiary owes spousal or child support, any government office, and parties who have won a tort judgment against the beneficiary. The latter group, known as "judgment creditors," may be able to reach any assets granted to an irrevocable trust beneficiary.
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