14-10505

14-10505. Creditor's claim against
settlor

A. Whether or not the terms of a trust contain a spendthrift provision, the
following rules apply:

1. During the lifetime of the settlor, the property of a revocable trust is subject
to claims of the settlor's creditors. If a trust has more than one settlor or
contributor, the amount the creditor or assignee of a particular settlor may reach may
not exceed the settlor's interest in the portion of the trust attributable to that
settlor's contribution. This paragraph does not abrogate otherwise applicable laws
relating to community property.

2. Subject to the requirements of this section, with respect to an irrevocable
trust, a creditor or assignee of the settlor may reach the maximum amount that can be
distributed to or for the settlor's benefit. If a trust has more than one settlor, the
amount the creditor or assignee of a particular settlor may reach may not exceed the
settlor's interest in the portion of the trust attributable to that settlor's
contribution. This paragraph does not apply to any trust from which any distribution to
the settlor can be made pursuant to the exercise of a power of appointment held by a
third party or abrogate otherwise applicable laws relating to community property. A
creditor of a settlor:

(a) Shall not reach any trust property based on a trustee's, trust protector's or
third party's power, whether or not discretionary, to pay or reimburse the settlor for
any income tax on trust income or trust principal that is payable by the settlor under
the law imposing the tax or to pay the tax directly to any taxing authority.

(b) Is not entitled to any payment or reimbursement that is to be made directly to
any taxing authority.

3. After the death of a settlor, and subject to the settlor's right to direct the
source from which liabilities will be paid, the property of a trust that was revocable at
the settlor's death is subject to claims of the settlor's creditors, costs of
administration of the settlor's estate, the expenses of the settlor's funeral and
disposal of remains and statutory allowances to a surviving spouse and children to the
extent the settlor's probate estate is inadequate to satisfy those claims, costs,
expenses and allowances, except to the extent that state or federal law exempts any
property of the trust from these claims, costs, expenses or allowances.

B. For the purposes of this section:

1. During the period the power may be exercised, the holder of a power of
withdrawal is treated in the same manner as the settlor of a revocable trust to the
extent of the property subject to the power.

2. On the lapse, release or waiver of a power of withdrawal, the holder is treated
as the settlor of the trust only to the extent the value of the property affected by the
lapse, release or waiver exceeds the greater of the amount specified in section
2041(b)(2) or 2514(e) of the internal revenue code, or section 2503(b) of the internal
revenue code. On the lapse, release or waiver of a power of withdrawal in the case of a
trust created under section 2503(c) of the internal revenue code, the holder will not be
treated as the settlor of the trust.

C. For the purposes of this section, a trust settled or established by a
corporation, professional corporation, partnership, limited liability company,
governmental entity, trust, foundation or other entity is not deemed to be settled or
established by its directors, officers, shareholders, partners, members, managers,
employees, beneficiaries or agents.

D. For the purposes of this section, amounts contributed to a trust by a
corporation, professional corporation, partnership, limited liability company,
governmental entity, trust, foundation or other entity are not deemed to have been
contributed by its directors, officers, shareholders, partners, employees, beneficiaries
or agents. Powers, duties or responsibilities granted to or reserved by the settlor
pursuant to the trust and any actions or omissions taken pursuant to the trust are deemed
to be the powers, responsibilities, duties, actions or omissions of the settlor and not
those of its directors, officers, shareholders, partners, members, managers, employees,
beneficiaries or agents.

E. For the purposes of this section, amounts and property contributed to the
following trusts are not deemed to have been contributed by the settlor, and a person who
would otherwise be treated as a settlor or a deemed settlor of the following trusts shall
not be treated as a settlor:

1. An irrevocable inter vivos marital trust that is treated as qualified terminable
interest property under section 2523(f) of the internal revenue code if the settlor is a
beneficiary of the trust after the death of the settlor's spouse.

2. An irrevocable inter vivos marital trust that is treated as a general power of
appointment trust under section 2523(e) of the internal revenue code if the settlor is a
beneficiary of the trust after the death of the settlor's spouse.

3. An irrevocable inter vivos trust for the settlor's spouse that does not qualify
for the gift tax marital deduction if the settlor is a beneficiary of the trust after the
death of the settlor's spouse.

4. An irrevocable inter vivos trust created by the settlor's spouse for the benefit
of the settlor, regardless of whether or when the settlor also created an irrevocable
inter vivos trust with respect to which such spouse is a beneficiary.

F. For the purposes of subsection E, a person is a beneficiary whether so named
under the initial trust instrument or through the exercise by that person's spouse or by
another person of a limited or general power of appointment.

G. Subsections C and D do not apply to:

1. A trust that has no valid business purpose and that has as its principal purpose
the evasion of the claims of the creditors of the persons or entities listed in those
subsections.

2. A trust that would be treated as a grantor trust pursuant to sections 671
through 679 of the internal revenue code. This paragraph does not apply to a qualified
subchapter S trust that is treated as a grantor trust solely by application of section
1361(d) of the internal revenue code.