The use of a spendthrift provision in a trust instrument is common. Generally, spendthrift provisions prohibit a third-party creditor from reaching a beneficiary’s interest in income and/or corpus of the trust until the trustee distributes such interest outright to the beneficiary. Because spendthrift provisions are creatures of state law, a common question is whether such protection extends to the IRS as a third-party creditor? This Insight discusses this topic more below.
The Federal Tax Lien.
A federal tax lien arises when a taxpayer owes tax and fails to pay such tax. Under the Internal Revenue Code, it also arises on the date the tax was assessed and continues until the tax is either paid or becomes unenforceable due to lapse of time. See I.R.C. § 6322.
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