Garnishment is a legal procedure by which a judgment creditor can collect on the judgment by taking the debtor's money or property. Property and money held in a trust may or may not be susceptible to garnishment. The answer generally depends on whether the trust is revocable or irrevocable, and also on whether the debtor is trustor (the person who created the trust) or a trust beneficiary.
In a situation where debts must be resolved with creditors, both revocable and irrevocable trusts can be subject to garnishing.
Understanding Revocable Trusts
Trusts may be revocable or irrevocable. Each trust is different, and the creator of each trust generally determines whether the trust is revocable. As the name implies, a revocable trust can be revoked, or terminated, at any time by the trust creator. This means that for legal purposes the trust creator is still considered the owner of the trust property since the creator could take that property back at anytime. Therefore, if a judgment debtor is also the creator of a revocable trust, the judgment creditor can generally garnish the money or property held by that trust.
Exploring Irrevocable Trusts
A trust that is irrevocable is a trust that the creator cannot terminate, or take property away from, without permission from either a court or from the trust beneficiaries. Because the trust property is not subject to being revoked at any time, the trust creator is not legally the owner of the trust property. Therefore, property held by a irrevocable trust is generally inaccessible for garnishment. However, if the trustor is also the only beneficiary of the trust, the creditor may be able to garnish the trust property even if the trust is technically irrevocable. Single-entity trusts where the trustor and beneficiary are the same person do not provide as much legal asset protection as trusts involving beneficiaries different than the trustor.
Identifying the Trust Beneficiary
If the judgment debtor is a beneficiary of the trust, but not the trustor, then the issue changes slightly. A creditor of a beneficiary has the same right to access the property in the trust as the beneficiary has. If the beneficiary has the unilateral right to take a certain amount of money or property from the trust at any time, then a judgment creditor can generally garnish that same amount of property or money from the trust. However, most trusts set up periodic disbursements to the beneficiary, which means the creditor can only garnish the trust property or money over time as it is disbursed to the beneficiary.
Important Legal Limitations
Most state laws provide that a garnishment cannot take all of the money or property that the debtor uses for basic living expenses. If a trust is a beneficiary's sole means of income, then the creditor will be limited in the amount of trust money it can garnish. The trustee will have to leave some money or property to the beneficiary in order to allow the beneficiary to cover basic living expenses. The exact amount that a creditor can garnish varies according to each state's unique laws.