Can the IRS Seize Property in a Trust?

The Internal Revenue Service (IRS) has the authority to seize and sell assets to satisfy unpaid tax debts. This includes property held in a trust. However, the IRS’s ability to levy on trust assets is limited by certain legal protections, including spendthrift provisions and nominee liability.

Spendthrift Provisions

Spendthrift provisions are clauses in trust documents that restrict the beneficiary’s ability to access or transfer the trust assets. These provisions are designed to protect the beneficiary from creditors, including the IRS.

In general, spendthrift provisions are effective in preventing the IRS from levying on trust assets. However, there are some exceptions to this rule. For example, the IRS may be able to levy on trust assets if:

The trust is a sham or was created to avoid creditors.
The beneficiary has a legal obligation to support a spouse or child, and the trust assets are used to satisfy that obligation.
The trust assets are used to pay for the beneficiary’s criminal activities.

Nominee Liability

Nominee liability is a legal doctrine that allows the IRS to levy on assets held by a third party on behalf of the taxpayer. This doctrine can apply to trust assets if the trustee is considered the taxpayer’s nominee.

For nominee liability to apply, the following elements must be met:

The taxpayer must have transferred the assets to the trustee.
The taxpayer must retain control over the assets.
The trustee must not have a substantial interest in the assets.

If the IRS can establish nominee liability, it may be able to levy on the trust assets even if the trust is protected by a spendthrift provision.

Protecting Trust Assets from IRS Levy

There are several steps that can be taken to protect trust assets from IRS levy, including:

Creating an irrevocable trust. Irrevocable trusts are not considered to be owned by the taxpayer, so the IRS cannot levy on them.
Including a spendthrift provision in the trust document. Spendthrift provisions can prevent the beneficiary from accessing or transferring the trust assets, making them less vulnerable to IRS levy.
Avoiding nominee liability. To avoid nominee liability, the taxpayer should not transfer assets to the trust and should not retain control over the assets.

The IRS has the authority to levy on trust assets to satisfy unpaid tax debts. However, this authority is limited by certain legal protections, including spendthrift provisions and nominee liability. By taking steps to protect trust assets, taxpayers can reduce the risk of IRS levy.

Frequently Asked Questions

Can the IRS levy on a revocable trust?

Yes, the IRS can levy on a revocable trust because the taxpayer is considered to be the owner of the assets in the trust.

Can the IRS levy on an irrevocable trust?

Generally, the IRS cannot levy on an irrevocable trust because the taxpayer is not considered to be the owner of the assets in the trust. However, there are some exceptions to this rule, such as if the trust is a sham or was created to avoid creditors.

What are some steps that can be taken to protect trust assets from IRS levy?

Some steps that can be taken to protect trust assets from IRS levy include:

Creating an irrevocable trust.
Including a spendthrift provision in the trust document.
Avoiding nominee liability.

What should I do if the IRS has levied on my trust assets?

If the IRS has levied on your trust assets, you should contact a tax attorney immediately. A tax attorney can help you understand your rights and options and can represent you in negotiations with the IRS.

Trusts, Tax Liens, and Real Estate: When Does Trust Property Avoid an IRS Lien?

FAQ

Can the IRS put a lien on your house if its in a trust?

However, any other assets, such as, but not limited to, improvements such as buildings on trust land, vehicles, bank accounts, earnings, and fee simple land, owned by individuals, are subject to seizure, Federal Tax Liens, garnishments, and levies.

How do I protect my assets from the IRS?

Depending on what assets you have, there are several ways to avoid having those assets seized by the IRS. The best ways to prevent seizure of assets is to not legally own the assets anymore, don’t let the IRS know about the assets, or show the IRS that it is not financially worth it to them to seize certain assets.

Can the IRS take my inheritance if I owe taxes?

But that doesn’t mean what you have coming in a will is entirely yours if the deceased owes money to the IRS. “The money and property you inherit is subject to be used in settling the tax debt of the deceased,” said Derek Jacques, a general practice attorney at The Mitten Law Firm in Detroit.

Can the federal government seize an irrevocable trust?

Typically, creditors – such as the federal government, in this case – cannot seek recovery of assets held in an irrevocable trust; only revocable trusts can be attacked.

Can the IRS seize your assets?

The IRS can legally seize your assets to collect taxes you owe. Which assets can the IRS seize? Any valuable assets can becomes cash, so the IRS can seize them. Typically, these items are sold at a public auction for tax debt repayment after your last chance to reclaim them. Properties, such as houses, vacation homes, or other real estate.

What happens if the IRS seizes your property for tax debt?

When the IRS seizes your property for tax debt, they sell it and use the money to pay your taxes after covering the sale costs. Before the sale, they set a minimum bid price, inform you about it, and allow you to challenge their valuation. They advertise the sale publicly, wait at least 10 days, then sell the property.

What happens after a property is seized?

What happens after my property is seized? If the IRS seizes your house or other property, the IRS will sell your interest in the property and apply the proceeds (after the costs of the sale) to your tax debt. Prior to selling your property, the IRS will calculate a minimum bid price.

Can I appeal a seizure if the IRS seized my property?

You can immediately contact the IRS to resolve your tax liability and request the release of the seizure. The IRS might release the seizure if it’s causing you immediate economic hardship. However, if they deny your release request, you can appeal either before or after they seize and sell your property.