Can a Lien Be Put Against a Living Trust?

By Karyn Maier

A living trust is created to keep the contents of a will private or to guard against the mishandling of funds intended for specific recipients at a future date. This instrument also allows you to pass property and other interests to beneficiaries without the need for probate, which can save time and expenses for the people concerned. Although a lien cannot affect a living trust as an intangible entity, a lien is usually enforceable against the assets it transfers.

Description

When you establish a trust inter vivos, it means that you are declaring by legal instrument to grant, or transfer, your property to a trustee while you are still living. In other words, it is a legal contract that becomes effective immediately. This contrasts with a last will and testament that directs an executor to possess and distribute your property after your death. One of the primary reasons for creating a living trust is to avoid probate proceedings, even when there is property existing in different states.

Asset Protection

It is a common misconception that a living trust automatically protects assets from a judgment or lien. Generally, all of the property transferred in a living trust is still the property of the person making the declaration of trust unless the transfer constitutes a sale. Most people appoint themselves as trustee to retain control of the trust assets during their lifetime. This means the trust is revocable and can be changed at the discretion of the grantor as trustee at any time. As such, the property is subject to seizure as the result of a lien if a court awards a judgment against the grantor of the trust. However, the lien only attaches to the grantor’s share.

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Liens against Beneficiaries

Assets placed in a living trust are not protected from a lien placed against a beneficiary of that trust. However, the trustee is not obliged to make a premature distribution of assets to the beneficiary to satisfy a judgment. In addition, a creditor can only attach a lien against the beneficiary’s interest in the trust.

Sale of Assets

It may be possible to protect certain assets in a trust from a lien if they are sold to or placed in a limited liability corporation, or LLC, that is owned by the trust and not the grantor or trustee. Depending on the type of property, however, this may not be advantageous. For example, the sale or transfer of real property that is subject to a mortgage will usually accelerate demand to satisfy full payment of the note at the time of the sale.

Considerations

Despite attempts to introduce legal consistency between states regarding trust law under the Uniform Trust Code, or UTC, not all states have adopted it and those that have continue to incorporate their own statues. In short, trust laws may vary between states. If you have questions or concerns about how a lien might affect a living trust, consult a qualified attorney experienced in estate planning.

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Can a Property Owned by an Irrevocable Trust Be Foreclosed?
 

References

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Living Trust Protection From Creditors

A living trust is an estate planning tool that can save time and money by bypassing the probate process after the trust maker dies. Unlike a will, a trust does not require a probate court's approval or administration. Living trusts are so called because they take effect during the maker's lifetime and can be changed or revoked at any time before his death. Besides skipping probate, living trusts can protect beneficiaries from creditors. Spendthrift clauses, as the name suggests, protect beneficiaries who spend money irresponsibly and face bill collectors. Spendthrift clauses also protect beneficiaries who accumulate bills for unavoidable reasons like medical problems or job loss.

What Is a Deed of Trust With Assignment of Rents?

Some states refer to a voluntary lien against real property in exchange for money as a mortgage, while others refer to it as a deed of trust. Both mortgages and deeds of trust may incorporate an assignment of rents and leases that allows the lender to collect rent money held by,or due to, the property owner by tenants once the owner defaults or fails to make payments. An assignment of rents and leases may also be recorded as a separate document.

How Does a Living Trust Protect Assets?

Creating a trust to holds assets can help the grantor while he is alive and continue to serve him after his death. A living trust is created during the grantor's lifetime. It transfers title (ownership) of the grantor's property into the trust to be managed by a trustee for the benefit of a designated beneficiary. There are different types of living trusts and each can protect assets in a different way -- or not at all.

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