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Trust Law/Level VI · Protection/6.1 Spendthrift to self-settled/Lesson 5

Exception creditors: child support, taxes, fraud

Which US creditors can reach a beneficiary’s interest despite a spendthrift clause, where those exceptions come from, and why the answer varies by state.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Pay support, taxes and restitution directly; planning around them adds cost without reliable protection. Catch: UTC §503 support orders, federal tax liens (IRC §6321) and restitution liens (18 U.S.C. §3613) can reach trust interests and other property.
  2. Against ordinary tort and contract creditors, Nevada’s DAPT statute names no exception creditors, while Delaware lets support, alimony, divorce-property and pre-funding tort claims through (12 Del. C. §3573). Catch: those Delaware claimants are not bound by its limitation periods.
  3. Resolve federal tax debt through an IRS payment plan rather than moving assets; the lien even reached a tenancy-by-the-entirety interest in United States v. Craft (2002). Catch: transfers made to dodge a tax debt remain voidable.
  4. For Medicaid, relatives can leave money in a discretionary third-party trust, because 42 U.S.C. §1396p(d) counts trusts funded with the applicant’s own assets, to the extent the trustee could pay the applicant. Catch: self-funded trusts escape only through narrow statutory exceptions.

MaterialsYour state’s version of Uniform Trust Code §503, if it enacted one, and the uniform text for comparisonLessons 3.2.6 and 4.3.2, on spendthrift clauses and their limitsThe text of 26 U.S.C. §6321 (federal tax lien) and 18 U.S.C. §3613 (federal fines and restitution), free on law.cornell.edu

Wonder

  1. Why do support claims of a child or former spouse get past a spendthrift clause in many states?
  2. Can a federal tax lien reach a beneficiary’s interest in a trust?
  3. Do domestic asset protection trust states have exception creditors too?

Explore

  1. A spendthrift clause generally stops a beneficiary’s creditors from reaching the interest before it is paid out, but some creditors are treated as exceptions. The Restatement (Third) of Trusts §59 names two groups: a beneficiary’s child, spouse or former spouse with a claim for support, and those who supplied necessities or services that protected the beneficiary’s interest in the trust. The reasoning is that a trust should not let a beneficiary live on trust money while ignoring family support duties. Restatements are not statutes, and states have not all accepted these exceptions, so the rule depends on the state.
  2. The Uniform Trust Code (2000) narrows that list. In its uniform text, UTC §503 makes a spendthrift clause unenforceable against a beneficiary’s child, spouse or former spouse with a judgment or court order for support or maintenance; against a judgment creditor who provided services to protect the beneficiary’s interest in the trust; and against claims of the state or the United States where a statute provides. It leaves out suppliers of necessities and tort claimants. Such a claimant may ask a court to attach present or future distributions, and the court may limit the relief. States differ: Maine, for example, enacted none of these §503 exceptions (lesson 4.3.2).
  3. Federal tax claims follow federal law. Under 26 U.S.C. §6321, a federal tax lien attaches to all ‘property and rights to property’ of a person who fails to pay tax after demand. State law decides what rights the person has; federal law decides whether those rights count as property for the lien. In United States v. Craft (2002), the Supreme Court used that approach to hold that a husband’s interest in land he held with his wife as tenants by the entirety was property to which the lien could attach, although state law shielded it from his separate creditors. Craft did not involve a trust; how a lien applies to a trust interest depends on that interest’s terms.
  4. Federal criminal fines and restitution reach similarly. Under 18 U.S.C. §3613, a federal fine or restitution order can be enforced against all property or rights to property of the person, with exceptions borrowed from the tax levy rules, and it becomes a lien like a tax lien. How this applies to a particular trust interest depends on the interest and on court decisions, which vary. Public benefits work differently. For Medicaid, a trust funded with the applicant’s own assets is generally counted as available to the extent the trustee could pay it to the applicant (42 U.S.C. §1396p(d)(3)), apart from special statutory trusts (lesson 4.2.2).
  5. Self-settled trusts add another layer. Under UTC §505, a settlor’s own creditors can generally reach whatever the trustee could pay to the settlor, so they need no exception at all. Domestic asset protection trust statutes, which do protect some self-settled trusts, write their own exception lists. Delaware’s, for example, lets certain claims for child support, alimony or a divorce property division, and tort claims existing when the trust was funded, reach the trust (12 Del. C. §3573); Nevada’s statute is commonly described as having no exception creditors. In bankruptcy, 11 U.S.C. §548(e) separately reaches transfers to a self-settled trust made within 10 years with actual intent to hinder, delay or defraud.
  6. Because these rules come from different sources, the same creditor can succeed in one place and fail in another: a support claimant may reach distributions in a state that enacted the §503 support exception but not in one that left it out, and federal tax and criminal claims follow federal statutes rather than the trust’s terms. The exceptions show that spendthrift protection is a policy choice made by each legislature, not a built-in property of trusts. This lesson describes the exceptions; whether one applies to a given trust depends on its governing law, its terms and the facts.

Key facts

  • Restatement (Third) of Trusts §59 excepts support claims of a child, spouse or former spouse, and claims for necessities or services protecting the beneficiary’s interest.
  • In its uniform text, UTC §503 excepts support orders for a child, spouse or former spouse, creditors who protected the beneficiary’s interest, and state or federal claims where a statute provides; states vary.
  • A federal tax lien attaches to all ‘property and rights to property’ of a taxpayer who fails to pay after demand (26 U.S.C. §6321).
  • In United States v. Craft (2002), the Supreme Court held that a federal tax lien could attach to a spouse’s interest in tenancy-by-the-entirety property; the case did not involve a trust.
  • Federal fines and restitution can be enforced against all property or rights to property of the person, with limited exceptions (18 U.S.C. §3613).
  • Delaware’s asset protection trust statute (12 Del. C. §3573) lets certain support, alimony, divorce property and pre-existing tort claims reach the trust.

Exercise nine, six, three, one

9CollectList up to 9 kinds of claims that might be made against a trust beneficiary in a case or example you are reading about (some lists are shorter), such as a child support order, unpaid federal tax, a restitution order, a credit card judgment, a lawyer’s bill for defending the trust interest or a tort claim.
6ClusterSort them into 6 categories: family support, federal tax, criminal fines and restitution, services protecting the trust interest, ordinary contract or tort creditors, and claims you are unsure about.
3DistillReduce the 6 categories to 3 groups: claims excepted under the uniform text of UTC §503, claims governed mainly by federal statute, and claims a spendthrift clause usually blocks.
1CrystallizeWrite 1 sentence explaining, in your own words, why the same support claim might reach a trust interest in one US state and not in another.

Fact check

Dates, figures and claims checked against the published sources listed below.

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