SB179
Alabama Trust Law Changes on Creditors and Taxes
In one sentence
This law changes Alabama rules about trusts to limit when creditors can reach trust property, clarify who counts as a creator of the trust regarding withdrawal powers and appointments, and allow trustees to pay settlor income taxes without those payments counting toward creditor claims.
What it does
- Removes the rule that treats holders of a power of withdrawal in an irrevocable trust as creators (settlors) when the power lapses, is released, or waived, except for amounts exceeding specific federal tax code limits.
- States that beneficiaries who hold a power of withdrawal are not considered creators if that power lapses.
- Allows trustees to pay or reimburse a settlor's personal income taxes on trust principal and income without counting those payments as distributions made for the settlor's benefit.
- Clarifies that people, including previous settlers, who become beneficiaries through someone else exercising a power of appointment are not considered creators of the trust.
Who it affects
- Trustees managing trusts under Alabama law
- Settlors (creators) of irrevocable and revocable trusts
- Beneficiaries holding powers of withdrawal or receiving interests via power of appointment
- Creditors seeking to collect debts from trust property
Limits and unknowns
- This law applies to trusts governed by the Alabama Uniform Trust Code.
- The exception for holders of a power of withdrawal depends on amounts exceeding limits set in federal Internal Revenue Code sections as they existed or were amended after January 1, 2007.
- Creditors can still reach property in revocable trusts during the settlor's lifetime.
Plain language
Terms to know
- Irrevocable Trust
- A trust that generally cannot be changed or canceled by the person who created it.
- Power of Withdrawal
- The right to take money out of a trust, which can affect whether someone is treated as the creator for creditor purposes.
- Settlor
- The person who creates and funds a trust; under this law, certain people with withdrawal powers or appointment interests may no longer be considered settlors in specific situations.
Official record
Sources
Official summary
This act amends Sections 19-3B-505 and 19-3B-816, Code of Alabama 1975, to: (1) remove the treatment of holders of the power of withdrawal from an irrevocable trust as settlors when the power lapses, is released, or waived for purposes of creditors reaching a settlor's interests in the trust; (2) provide a beneficiary of an irrevocable trust holding a power of withdrawal is not a settlor upon the power lapsing; (3) authorize trustees to pay or reimburse a settlor's personal income tax liabilities for a trust's principal and income and provide such payment or reimbursement is not considered amounts distributed to or for the settlor's benefit; and (4) provide that beneficiaries, including previous settlors, who acquire an interest in a trust through the exercise of a power of appointment by another are not deemed settlors.
Official activity
Bill history
- EnactedSenate
- Motion to Read a Third Time and Pass - Adopted Roll Call 1265 (Yeas 102, Nays 0)House
- Third Reading in Second House (Yeas 99, Nays 0)House
- Signature RequestedHouse
- Delivered to GovernorSenate
- EnrolledSenate
- Ready to EnrollSenate
- Read for the Second Time and placed on the CalendarHouse
- Reported Out of Committee Second HouseHouse
- Pending Committee Action in Second HouseHouse
- Read for the first time and referred to the House Committee on JudiciaryHouse
- Motion to Read a Third Time and Pass - Adopted Roll Call 932 (Yeas 27, Nays 0)Senate
- Third Reading in House of Origin (Yeas 27, Nays 0)Senate
- Read for the Second Time and placed on the CalendarSenate
- Reported Out of Committee House of OriginSenate
- Pending Committee Action in House of OriginSenate
- Read for the first time and referred to the Senate Committee on JudiciarySenate