If you're in debt and have a court judgment against you, any bank accounts you own may be subject to a levy. Individual states enforce the laws on bank levies, while the Internal Revenue Service has its own set of rules written into the federal tax code. Whether a trust fund can be levied depends largely on your state law, the type of trust it is and the creditor who's coming after your funds.
Basics of Levies
A creditor can enforce a judgment with a bank levy. The creditor asks the court that issued the judgment to issue a writ of execution, which the creditor delivers to law enforcement. In turn, the authorities serve the documents on your bank, which is obliged by law to freeze the money in the account. State law sets down the rules and procedures and will give you a short window of time in which to contest the levy. You may escape a levy by showing that an account only contains exempt funds, such as Social Security benefits.
An account set up as a separate entity for the benefit of another individual or group is also known as a trust fund. When you set up a trust, you can make it revocable -- meaning you can change the terms at any time -- or irrevocable, meaning you can only change the terms under limited circumstances. For most legal and tax purposes, a revocable trust remains your property. An irrevocable trust is separate and holds its assets under a separate name. A few states -- Alaska, Delaware, Nevada and South Dakota -- allow "asset protection trusts," which are irrevocable trust accounts designed to protect funds from creditor levies.
Most states exempt specific trust account types -- defined as "trust accounts" by the IRS -- from attachment, garnishment or levy. This includes individual retirement accounts, individual annuity accounts and pension accounts set up by employers for the benefit of employees. Additionally, certain property may be exempt, including a homestead, a car, furnishings, jewelry, art and a limited amount of cash. In South Carolina, for example, up to $5,000 in cash is exempt from levy or seizure, no matter where it resides, as long as you don't claim a homestead exemption.
IRS and State Tax Levies
The IRS and state taxing authorities can levy funds from nonexempt trust accounts that name you as an owner or beneficiary. Typically the levy will freeze funds in the account for 21 days before the account custodian actually turns the money over to the agency. In a state-law case, such as a divorce, banks must follow state law on levies for such items as child support and alimony. For this purpose, New Jersey law allows levies on "cash or cash-equivalent assets," specifically naming trusts as one possible source.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.