Are Spendthrift Trust Interest Protected From IRS Tax Liens?

Jon Alper Florida Asset Protection Planning

The protections afforded a beneficiary’s interest in a spendthrift trust is settled Florida law. A judgment creditor cannot levy upon a debtor’s interest in future trust distributions so long as the debtor did not himself establish the trust for his own benefit. But, does Florida’s spendthrift trust law apply the same way to the IRS?

One of my clients told me that his brother owes IRS taxes and that the IRS has a tax lien. The client’s parents amended their estate plan so that their entire inheritance was passed to the client. The parents are both deceased. The client has received the entire inheritance. The client would like to give his brother his share of the inheritance without subjecting the assets to the IRS lien. He asked whether he can establish a spendthrift trust for his brother’s benefit to be funded with half of the inheritance money.

The issues is whether the IRS tax lien would apply to the debtor brother’s interest in the spendthrift trust and/or distributions from the trust. IRS tax liens apply to any and all assets owned by the taxpayer. IRS tax liens take precedence over state law exemptions. State law does apply to determine the nature of property interests held by the taxpayer.

The cases I found during preliminary research indicate that IRS tax liens do attach to a taxpayer’s interest in a spendthrift trusts. The taxpayer’s future equitable interest in trust distributions is within the scope of taxpayer assets subject to the lien. The IRS lien takes precedence of court decisions that have applied common law traditions of spendthrift trust protections.

The clients probably will not protect his brother’s equitable interest in their parents bequest. The better option is for the non-debtor client to make gifts of inheritance money to pay his brother’s expenses. The gifts should be made directly to this brother’s creditors rather than to the brother. Otherwise, the IRS lien would attach to the gifted funds when deposited in the brother’s bank account. After the IRS lien and tax debt expire (10 years from date due) the client may transfer money to the brother.

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