Even though past due taxes are owing on your house, you can put it in a trust unless there is an existing judgment for taxes due. Different trust forms, such as revocable and irrevocable trusts, offer slightly different asset protections. But regardless of the particular trust you put your home into, a trust offers virtually no protection against tax liens and judgments. This is absolutely true if the lien is an Internal Revenue Service tax lien.
If there is an existing judgment against your house because you failed to pay past-due taxes after the house was liened, you cannot put the house in trust. The lien is a claim on the house, which remains your property. The judgment, however, means you no longer have ownership rights, which the judgment conveys to the local or federal taxing authority. Since you can't put an asset in trust you don't own, you cant put the house in a trust after a tax lien and judgment.
Revocable Trust Protections
Homeowners sometimes put houses in trusts to avoid probate. Trusts formed for this purpose are generally revocable living trusts. Because the creation of the trust conveys ownership to the beneficiary, the home is no longer a part of the grantor's estate, so it doesn't enter into probate when the grantor dies. However, the grantor of the living trust -- the homeowner -- can change the terms of a revocable living trust at any time. For estate planning purposes, this is an ideal solution, because the grantor avoids probate but retains full control during her lifetime. Unfortunately, a revocable trust offers no protection against creditors, which includes local and federal tax authorities.
Irrevocable Trust Protections
An irrevocable trust is created by a trustee at the request of the grantor, in this instance a homeowner. Once the trust is created, the terms of the trust can be changed only by the trustee -- the homeowner no longer has that right. Where the trustee is the homeowner's personal attorney, this allows the homeowner to retain a measure of control in the irrevocable trust while providing asset protections that a revocable trust does not. The theory is that because the grantor cannot change the terms of an irrevocable trust, creditors can't unwind the trust to reclaim its assets.
Irrevocable Trusts and Tax Debt
In practice, anyone trying to protect their home by putting it in an irrevocable trust faces one big problem: By law, an irrevocable trust can't be for the grantor's benefit. If you put your home in trust to avoid your creditors, clearly the purpose of the trust is to benefit you personally. Creditors' attorneys will quickly wind down such a trust and seize its assets. Beyond that problem is another, bigger problem: You can't protect against tax judgments with an irrevocable trust -- the tax judgment takes precedence. Therefore, while you can put your house in trust even if there are tax liens against it, doing so offers no protection against the tax judgment that follows.
- FindLaw: Difference Between Revocable, Irrevocable Trusts?
- Law Office of Ronald Runkle Runkle & Associates, P.C.: How Should My Home be Owned: In Trust or Out of Trust?
- Nolo: Can I Put Our House Into a Living Trust if I Have a Mortgage?
- Internal Revenue Service: Understanding a Federal Tax Lien
- Internal Revenue Service: Legal Reference Guide for Revenue Officers, Federal Tax Liens
- The Presser Law Firm, P.A.: Trust Basics
- Steve Mason/Photodisc/Getty Images
- How to Invest in Tax Liens & Tax Deeds
- How to Buy Tax Liens by Mail
- The Risks of Tax Lien Investing and How to Avoid Them
- How to Estimate IRS Taxes for the Self-Employed
- How to Determine Business Activity Code for Schedule C
- What Is a Real Estate Declarant?
- Can a Person Refinance a House if a Lien Is on the Property?