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.

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.

Protect your loved ones. Start My Estate Plan

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.

Protect your loved ones. Start My Estate Plan
What Is a Bank Trust Account?


Related articles

Does a Living Trust Affect Credit?

With a trust in place, you can pass your estate to your heirs outside of probate court. A "living" trust is created while a grantor of the trust is still alive. Once the trust is in place, a trustee manages the assets per your instructions. A grantor can name himself as trustee, and can transfer any property he wishes to the trust. Although a living trust can be useful in estate planning, it also carries a few implications for the grantor's credit.

Trustee Not Paying Beneficiary

A trustee is a party who administers the assets of a trust and distributes them to beneficiaries in compliance with terms established by the trust grantor. Although the terms of a trust often allow a trustee considerable discretion with respect to the distribution of assets to beneficiaries, beneficiaries have legal options if the trustee's refusal to distribute trust assets appears to be unjustified.

How to Set Up a Tax ID Number for a Trust Account

A trust is a legal arrangement that allows property to be held for the benefit of a named beneficiary. There are a variety of trusts that can fit almost any legal purpose. However, if a trust is not a grantor trust or the trust is created by two or more people, you will need to set up a tax identification number for the trust. A grantor trust is a living revocable trust in which the grantor maintains control of the trust and is the primary beneficiary. Therefore, a separate federal tax identification number is not necessary because the trust’s income is reported using the grantor’s Social Security number.

LegalZoom. Legal help is here. Start Here. Wills. Trusts. Attorney help.

Related articles

Can an Irrevocable Trust Be Pierced?

When you create an irrevocable trust, you surrenders ownership over the trust assets; you cannot unilaterally regain ...

Can the Trustee Freeze My Bank Account During a Bankruptcy?

Individual debtors often file for chapter 7 bankruptcy. Once a debtor files the bankruptcy petition, a bankruptcy ...

Can Creditors Freeze a Joint Checking Account Filing Chapter 7?

Creditors are stripped of their power over you when you file for bankruptcy protection, but this doesn't necessarily ...

Enforcing a Trust

A trust is a legal relationship in which a trustee holds property for beneficiaries, who are the individuals benefiting ...

Browse by category
Ready to Begin? GET STARTED