Trust assets aren't necessarily safe from a lockdown by the trust custodian. A bank that receives a judgment or court order can freeze a trust account until a debt is satisfied. Its authority to do this depends on how the trust is set up, who the beneficiaries are, and whether or not the trust has a "spendthrift" provision designed to stop a beneficiary from wasting money.
Revocable Trusts and Banks
Trusts are structures that hold assets under the management of a trustee, who acts on the instructions from the creator of the trust, known as the grantor. Banks commonly serve as trust custodians that hold assets including cash, investments, certificate of deposits, money market funds and other financial goods. A revocable trust is one that a grantor can change or revoke during his lifetime. Legally, assets belong to the trust, but the law also considers the grantor in full control of those assets. This has certain implications if the bank receives a court order and then tries to put a hold on the trust account.
Judgments and Levies
If a creditor sues a debtor and goes to court, a court that finds for the creditor will issue a judgment. The judgment allows the creditor to take action by any legal means to collect whatever amount the debtor owes him. One particularly useful collection method is bank garnishment. The creditor secures a writ of garnishment, a sheriff delivers the writ to the bank, the bank freezes the account, and then turns over available funds in the account funds to satisfy the debt. If the debtor is the grantor of a revocable trust, the creditor can levy on the trust, whether it's held by a bank or some other type of custodian.
Rights of Beneficiaries
If the grantor is the debtor, all assets in the revocable trust account are available to the creditor. This is also true if the trust is a "self-settled" trust, established for the benefit of the grantor. If the trust has named additional beneficiaries, this may affect their rights to receive income or payments from the trust. If the debt exceeds the value of the trust account, the garnishment can empty the account completely, leaving the beneficiaries with nothing. The court judgment and writ of garnishment support the creditor's claim to the assets, which prevails over the claims of the beneficiaries.
If the trust has a spendthrift clause, the creditor seeking a hold on the account may be out of luck. A spendthrift clause puts restrictions on a beneficiary's access to the funds. The idea is to prevent the beneficiary from needless, heedless spending. In effect, the spendthrift clause legally protects funds set out for the use of a beneficiary. However, a creditor may get access and the bank may place a hold if state or federal law allows priority to the debt. For example, laws typically allow debtors to access the account in cases of an IRS tax levy, or if the debtor owes child support.
Read More: How to Get Rid of a Trust
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.