Garnishment of Debtor’s Interest In An Irrevocable Charitable Trust

Many years ago one of my clients transferred a substantial amount of money to  an irrevocable charitable lead trust. Under the terms of the trust agreement the client receives a stream of income each year, and upon the client’s death all money in the charitable trust goes to a charity. The client wanted to know if trust assets or his  income is vulnerable to his lifetime creditors.

A charitable lead trust is a sophisticated income and estate tax planning tool. The client gets an immediate income tax benefit and a reduced taxable estate. My client assumed that since his gift to the trust benefits a  charity  the law would protect this money from civil judgments.

The charitable lead trust two distinct beneficial interests: the charity has a future beneficial remainder interest that vests upon the client’s death, and the client has a retained income interest during his lifetime. The irrevocable gift of the remainder interest to the charity is a transfer to a third party which is subject to general fraudulent transfer analysis. A creditor can recover money or an interest given to a charity to avoid the donor’s creditors.

This client’s charitable trust agreement provided that income distributions in charitable lead trusts are mandatory on a periodic basis. A judgment creditor could garnish scheduled income distributions. That the trust benefits a charity does not stop a creditor from getting money that benefits the donor.

Some people believe that gifts made to charitable trust and income received by donors is afforded special protection because of the donor’s charitable intent or the public benefit of support for a charity. Collection law and fraudulent transfer law has not recognized a different treatment of charitable transfers and retained donor benefits.

Last updated on May 22, 2020

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