We recently received an IRS levy, which asked us to freeze the property of an individual who serves as a trustee for a trust account. The trust is a revocable trust, and the trust account uses the individual’s social security number. The scope of the levy covers property and rights to property, such as deposits. Should the bank report and freeze the revocable trust deposit account?

No, the bank should not report and freeze the revocable trust deposit account, provided that the trustee is not the grantor or a beneficiary of the revocable trust.

A federal tax levy attaches to all property or “rights to property” of a delinquent taxpayer. State law determines whether a person has a right to property, and according to Illinois courts, a trustee possesses only a legal title to the property in the trust, while the beneficiaries maintain an equitable title in the trust property. This means that a trustee has title to the assets of the trust, but the beneficiaries are the real owners because they are entitled to the income or other benefits that the assets of the trust yield. While we are aware of an Illinois court that has held that a federal tax levy can reach the property of the trust when the delinquent taxpayer is a beneficiary to the trust, we are not aware of any Illinois court that has held that a federal tax levy can reach the trust property with respect to a delinquent taxpayer-trustee (when the trustee possesses only a legal title to the property).

Of course, the outcome with respect to holding and reporting the deposit account to the IRS would be different if the trustee was the grantor or a beneficiary of the revocable trust. In that case, the trustee would have an equitable interest in the deposit account, and the account likely would be subject to the federal tax levy.

For resources related to our guidance, please see:

  • Internal Revenue Code, 26 USC 6331(a) (“If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property . . . belonging to such person or on which there is a lien provided in this chapter for the payment of such tax.”)
  • Drye v. United States, 528 U.S. 49, 61 (1999) “We look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach, then to federal law to determine whether the taxpayer's state-delineated rights qualify as ‘property’ or ‘rights to property’ within the compass of the federal tax lien legislation.”
  • United States v. Schaudt, 2008 WL 4567645, at *5 and *6 (N.D. Ill. 2008) (“Under Illinois state law, a trustee holds ‘legal title’ to items under a trust, while a beneficiary under a trust holds ‘equitable title.’”) (“It is clear that [the taxpayer’s] equitable interest in the Northbrook Property qualifies as ‘property’ under federal law, as the Supreme Court has unequivocally held that, without question, the federal tax lien statute reaches equitable interests owned for the benefit of the taxpayer.”)
  • IRS Internal Revenue Manual, Collecting Process, Levy and Sale (“The extent, if any, to which a levy may be made on the corpus of the trust or on trust income to satisfy the tax liability of the trustee depends on the nature of the trust instrument and the relationship between the trust and the taxpayer. Because a trustee holds bare legal title for the benefit of others, neither the corpus nor income therefrom may generally be levied upon to satisfy the trustee’s individual tax liabilities. The exception is if the trustee-taxpayer is a beneficiary, which would permit a levy and seizure to be made of his/her property or rights to property in the trust, as would be the case if any other beneficiary was indebted to the United States for delinquent taxes.”)