The Vermont Statutes Online

Title 14A : Trusts

Chapter 005 : Creditor's Claims; Spendthrift and Discretionary Trusts

• § 505. 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.

  (2) 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 shall not exceed the settlor’s interest in the portion of the trust attributable to that settlor’s contribution. This subdivision shall not apply to an irrevocable “special needs trust” established for a disabled person as described in 42 U.S.C. § 1396p(d)(4) or similar federal law governing the transfer to such a trust.

  (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.

  (b) For 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; and

  (2) upon the lapse, release, or waiver of the power, 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 § 2041(b)(2) or 2514(e) of the Internal Revenue Code of 1986, or § 2503(b) of the Internal Revenue Code of 1986, in each case as in effect on the effective date of this title.

  (c)(1) Property held by spouses as tenants by the entirety that is conveyed to the spouses’ jointly or separately held revocable or irrevocable trusts, and any proceeds of the sale or disposition of the property, shall be immune from the claims of the spouses’ separate creditors to the same extent as the property would have been if it had remained held by the spouses as tenants by the entirety if the following apply:

  (A) the spouses are married to each other;

  (B) the property is held in the trust or trusts or has been deeded out of the trust to the spouses as tenants by the entirety;

  (C) if the trust is a joint trust, the trust may be revoked by either spouse acting alone but may be amended only by action of both spouses;

  (D) the property is the spouses’ property; and

  (E)(i) both spouses are current beneficiaries of one joint trust that holds the entire property; or

  (ii) each spouse is a current beneficiary of a separate trust and the two separate trusts, together, hold the entire property, whether or not other persons are also current or future beneficiaries of the trust or trusts.

  (2)(A) Property at any time held in a tenants by the entirety trust shall have the same immunity from the claims of a separate creditor of either settlor as the property would have if it were held outside the trust by the settlors as tenants by the entirety unless otherwise provided in writing by the settlor or settlors who transferred the property to the trust. The property shall be treated in all respects as tenants by the entirety property, including for purposes of federal and state bankruptcy laws.

  (B) Property held in a tenants by the entirety trust shall cease to receive immunity from the claims of creditors upon the dissolution of the settlors’ marriage by a court.

  (3) Except as otherwise provided in this title, on April 24, 2025:

  (A) notwithstanding 1 V.S.A. § 214, this subsection (c) applies to all trusts created before, on, or after April 24, 2025 and to property held by spouses as tenants by the entirety that is conveyed before, on, or after April 24, 2025;

  (B) this subsection (c) applies to all judicial proceedings concerning trusts commenced on or after April 24, 2025. (Added 2009, No. 20, § 1; amended 2025, No. 7, § 1, eff. April 24, 2025.)