Can a Bank Freeze a Revocable Trust Account?

By Tom Streissguth

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.

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.

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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.

Spendthrift Trusts

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.

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Can an Irrevocable Trust Be Pierced?

References

Related articles

The Difference Between a Grantor & a Beneficiary

Grantor is the legal term for a person who creates a trust, and beneficiaries are people named by the grantor to benefit from the trust by receiving the trust's property. The legal terms "grantor," "settlor," and "creator" have the same meaning and can be used interchangeably. A grantor and beneficiary have different roles in a trust, but either may serve as trustee of the trust. Although the grantor establishes a trust and may have the authority to change it, beneficiaries also have authority to amend or revoke the trust and take legal action to protect the trust in certain circumstances.

Bankruptcy & Frozen Bank Accounts

Bankruptcy can offer a financial clean slate to debtors, but many debtors are concerned about what will happen to their assets and accounts after they file. Bankruptcy laws protect debtors against many actions by creditors once the debtor files for bankruptcy, though creditors are not bound by those rules prior to the debtor filing his bankruptcy case.

Rights of the Beneficiary of a Family Trust

A family trust is a trust in which the beneficiaries are family relations of the grantor. Since the assets of a revocable trust legally belong to the grantor, beneficiaries have no rights in trust assets that are not subordinate to the grantor's right to unilaterally revoke the trust. The assets of an irrevocable trust, by contrast, legally belong to the beneficiaries subject to the trustee's fiduciary authority. Trust beneficiaries enjoy certain rights under state law.

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