Can the IRS Place a Lien on an Irrevocable Trust?

A federal tax lien attaches to all property and rights to property belonging to a person who owes unpaid federal taxes. Under 26 U.S.C. § 6321, the IRS lien reaches every interest a taxpayer holds, including present, future, contingent, and executory interests. Federal tax collection authority supersedes state debtor protection laws, which means the exemptions and creditor limitations that apply to ordinary judgment creditors do not necessarily apply to the IRS.

Whether an IRS tax lien attaches to assets held in an irrevocable trust depends on the taxpayer’s legal interest in the trust property. The answer varies based on who created the trust, how much control the grantor retained, and what distribution rights the beneficiary holds under the trust agreement.

Revocable Trusts Offer No Protection

A revocable living trust provides no protection from an IRS tax lien. The grantor of a revocable trust retains the power to revoke or amend the trust at any time, which means the grantor is treated as the owner of all trust assets for federal tax purposes under IRC § 676.

The IRS treats revocable trust property as the grantor’s personal property. A federal tax lien filed against the grantor attaches to every asset inside the revocable trust, and the IRS can levy on those assets to satisfy the tax debt. This result applies regardless of whether the trust includes spendthrift provisions or names someone other than the grantor as trustee.

Third-Party Irrevocable Trusts

An irrevocable trust created by one person for the benefit of another person presents a different analysis. The grantor has given up ownership of the trust property, and the trust assets do not belong to the grantor. A federal tax lien filed against the grantor generally cannot reach assets held in a properly structured irrevocable trust that the grantor does not control and from which the grantor cannot receive distributions.

The IRS analysis focuses on the beneficiary’s interest, not the grantor’s former ownership. Whether the lien attaches to a beneficiary’s interest depends on the type of trust involved.

Spendthrift Trusts

Florida Statutes § 736.0502 protects a beneficiary’s interest in a spendthrift trust from the claims of the beneficiary’s ordinary creditors. A spendthrift provision prohibits both voluntary and involuntary transfers of the beneficiary’s trust interest.

Federal tax liens override spendthrift protections. The United States Supreme Court has consistently held that a federal tax lien can attach to a taxpayer’s interest in trust property regardless of state-law spendthrift restrictions. A spendthrift clause that defeats ordinary creditors does not defeat the IRS.

Support Trusts

A support trust directs the trustee to distribute funds for the beneficiary’s health, education, maintenance, and support. The beneficiary of a support trust has a legally enforceable right to receive distributions necessary for basic support needs, even though the trustee retains discretion over the specific amounts and timing.

An IRS tax lien attaches to a beneficiary’s interest in a support trust. Because the beneficiary can compel the trustee to make distributions for support, the beneficiary holds a property right that the IRS can reach. The lien attaches to the beneficiary’s right to demand support distributions.

Pure Discretionary Trusts

A pure discretionary trust gives the trustee absolute and uncontrolled discretion over whether to make distributions to any beneficiary. The trustee is not required or directed to make any distributions. The beneficiary has no right to compel the trustee to distribute any amount for any purpose.

The IRS has acknowledged that a beneficiary of a pure discretionary trust does not hold a property interest to which a federal tax lien can attach. In a 2000 advisory opinion (2000 WL 33119640), the IRS stated that when a trust gives the trustee uncontrolled, absolute discretion with respect to distributions, the beneficiary has no basis to compel distributions and therefore has no interest subject to a federal tax lien.

The distinction between support and discretionary trusts is critical. A trust that requires distributions for support gives the beneficiary a right that the IRS can lien. A trust that grants the trustee complete discretion with no obligation to distribute gives the beneficiary no enforceable right, and the IRS has no property interest to which the lien can attach.

Self-Settled Irrevocable Trusts

An irrevocable trust created and funded by a person who is also a beneficiary presents the weakest case against an IRS lien. Under Florida Statutes § 736.0505(1)(b), creditors of a grantor who is also a beneficiary can reach the maximum amount that could be distributed to the grantor. The IRS’s collection authority is at least as broad as this state-law creditor remedy.

If the grantor retains any beneficial interest in the trust, the IRS will treat the trust assets as reachable. The federal tax lien attaches to whatever distribution rights the grantor-beneficiary holds. For a Florida resident who creates a self-settled irrevocable trust, the IRS can reach trust assets regardless of whether the trust is formed in Florida, Nevada, South Dakota, or any other domestic jurisdiction.

Nominee and Alter Ego Theories

Even when a trust is structured as an irrevocable third-party trust, the IRS may argue that the trust is the taxpayer’s nominee or alter ego. If the IRS establishes either theory, the tax lien attaches to the trust assets as though they belong to the taxpayer personally.

The IRS pursues nominee claims when it believes a taxpayer transferred assets to a trust but retained the actual benefits of ownership. Factors the IRS considers include whether the taxpayer continues to use the property, whether the taxpayer pays expenses related to the property, whether the taxpayer controls the trust or directs the trustee’s actions, and whether the trust was funded with little or no consideration from the trustee.

Courts have sustained IRS nominee claims against irrevocable trusts where the grantor continued to live in trust-owned property, paid the property’s expenses personally, held insurance in the grantor’s own name rather than the trust’s name, and used or rented the property without the trustee’s involvement. In those cases, courts concluded the trust was a legal fiction and the grantor retained the true benefits of ownership.

The alter ego theory applies when the taxpayer so completely dominates the trust that the trust has no independent existence. Courts apply this doctrine narrowly and have rejected alter ego claims against trusts that were validly created, served a legitimate purpose, and were administered independently by the trustee.

Structuring an Irrevocable Trust to Minimize IRS Exposure

An irrevocable trust designed to withstand IRS scrutiny must satisfy several structural requirements.

The grantor cannot be a beneficiary. Any retained beneficial interest creates a direct path for the IRS to reach trust assets, both under Florida’s self-settled trust rule and under federal tax lien law.

The trust must grant the trustee pure discretionary distribution authority with no mandatory support standard. A trust that directs the trustee to provide for the beneficiary’s “health, education, maintenance, and support” creates an enforceable right that the IRS can lien. A trust that gives the trustee absolute discretion over whether to make any distributions at all does not.

The trustee must administer the trust independently. The grantor should not direct investment decisions, instruct the trustee on distributions, or use trust property as though it were personally owned. The trustee should pay all trust expenses from trust accounts, hold insurance in the trust’s name, and maintain clear records demonstrating independent trust administration.

The trust should include a spendthrift provision even though it does not defeat the IRS. Spendthrift language remains effective against all creditors other than the IRS, and a trust that lacks a spendthrift clause may be vulnerable to ordinary creditors as well.

IRS Collection Tools vs. State Law Protections

The IRS holds collection authority that no private creditor possesses. Under 26 U.S.C. § 6334, the IRS can levy on property that is exempt from levy under state law, with limited exceptions for specific categories such as unemployment benefits and certain annuity payments. The IRS can also impose a lien on property that state law protects through debtor exemptions.

Florida’s trust creditor protections under §§ 736.0502 and 736.0504 are effective against judgment creditors, but the IRS is not limited by these state-law barriers. The only reliable protection against an IRS lien on trust assets is the absence of a taxable interest belonging to the taxpayer. When the trust is structured so that the beneficiary holds no enforceable right to distributions, there is no property interest for the lien to attach to. For information on how the IRS treats assets in other exempt categories, see our article about Florida exemptions from creditors.