Can a Lien Be Put Against a Living Trust

By Edward Haman

Can a Lien Be Put Against a Living Trust

By Edward Haman

The main benefits of a living trust are avoiding probate and keeping distributions private, and there may be tax advantages for a married couple. However, a living trust is very limited in its ability to protect assets from creditors. Whether a creditor can place a lien against a living trust asset will depend upon the type of trust and the nature of the lien.

Types of Living Trusts

Any living trust involves three parties, each with a distinct role:

  • The grantor, who is the person who creates the trust, and is also sometimes called the “trustor" or “settlor." A single individual or a married couple may be grantors.
  • The trustee, who is a person with the responsibility to hold and manage the trust assets.
  • The beneficiary, who is a person designated to receive the benefit of the trust.

However, nothing in the law is simple. To complicate things, one person may fit into more than one role. A grantor may also be a trustee or a beneficiary, and a beneficiary may also be a trustee. No debt of a third-party trustee, who is neither a grantor nor a beneficiary, may be used to place a lien on trust assets. Only the debts of a grantor or a beneficiary can result in a lien on trust assets. If the grantor or beneficiary also happens to be a trustee, it is their position as grantor or beneficiary that allows the lien to attach.

There are two types of living trusts:

  • Revocable Trusts. This is a where the grantor has the right to change or cancel the trust. Assets are transferred to the trust, but the grantor can transfer them out of the trust at any time. Revocable trusts are most commonly used to avoid probate, and keep assets and distribution private. They can also serve to some extent to lower or delay estate taxes.
  • Irrevocable Trusts. With this type of trust, the grantor gives up the right to change or cancel the trust. Assets are irreversibly transferred to the trust. An irrevocable trust is commonly created to remove assets from the grantor so they are not counted in determining whether the grantor qualifies for Medicaid payment of long-term care.

Liens and Living Trusts

A lien is a legal claim that is placed on real or personal property to secure the payment of a debt. Liens are governed by state law. All states have laws providing that some assets are protected from creditors, but they apply regardless of whether the assets are held by a trust.

This section primarily discusses revocable living trusts. Differences involved with an irrevocable trust are noted where applicable. Based upon the debts of a grantor or a beneficiary, there are various types of liens that may relate to trust property.

Voluntary Lien

This is a lien with the consent of the property owner. A common voluntary lien is a home mortgage, which may be placed on property either before or after it is transferred to the trust. If there is a mortgage on property, you may execute a deed transferring the property to the living trust, but the mortgage will remain.

Similarly, personal property can be used as collateral to secure payment of a loan, such as a car loan. If title to the car is transferred to the trust, the lien on the car title remains.

Mechanic's Lien

Also known as a material-man's lien, this is placed on real property by a contractor or subcontractor who provides construction services or materials. If a contractor works on property held by the trust, a mechanic's lien may be placed on it. If there is a mechanic's lien on property before it is placed in the trust, the lien continues in effect after it is placed in the trust.

Judgment Lien

This is a lien to secure payment of a court judgment. Whether a judgment lien can be placed on an asset in a living trust depends upon whether the judgment is against a grantor or a beneficiary.

Once a judgment is entered against a grantor, the judgment creditor may place a lien on the grantor's property, regardless of whether it is in a trust. This includes real estate and personal property. With an irrevocable trust, state law may protect trust assets from judgment liens against a grantor.

Generally, if a judgment is against a beneficiary, a lien may not be placed against the assets of a living trust, because a beneficiary does not have an ownership interest in trust assets. However, once any trust funds are distributed to the beneficiary, the creditor can go after those funds.

Tax Lien

This is a lien by a government authority to secure the payment of past-due taxes. If property taxes are not paid, a lien may be placed on the property, regardless of whether it is in a trust. If a grantor owes money for delinquent income taxes, the IRS, state, or local taxing authority can place a tax lien on trust assets.

When a beneficiary owes delinquent taxes, if state law allows, a tax lien may be placed on trust assets only to the extent of a distribution that the trust requires the trustee to make to the beneficiary.

Medicaid Lien

If a grantor receives Medicaid benefits, the state may place a lien on trust property to secure recovery of those benefits. However, assets in an irrevocable trust are not subject to a Medicaid lien.

A living trust provides very little protection against liens. There are other ways to protect assets as part of your overall estate plan, either separately or in conjunction with a trust.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

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