Can a beneficiary give a gift to an irrevocable trust?

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Can a beneficiary give a gift to an irrevocable trust?

Post by bostondan »

I'm not planning on doing this personally, but it came up in conversation and I cannot find a reliable answer.

Question - Can the beneficiary of an irrevocable trust make a gift to that trust?

This specifically came up because someone asked me about paying taxes for a trust. The beneficiary wants to cut the check for the trust's tax payment, which is apparently only around $500. I assume this $500 would be considered a gift from the beneficiary to the trust. I know that comingling assets can reduce trust protections, but I was not sure if this maneuver is strictly disallowed or not.

Another example given was if the beneficiary planned to use the trust as an accumulation trust, but had to take $5000 one time from the trust. The beneficiary then has ample assets of her own and wants to put that $5000 back into the trust. I know she could put it into a new irrevocable trust if she wants to set one up (e.g. for the benefit of her children), but can she put it back into the trust for which she is the beneficiary if she then plans on never touching it again?

I am sure I am oversimplifying this. Nonetheless, I'll ask this next question too. Is this strictly disallowed? Does it risk completely removing the protection afforded by the trust (by more than a negligible amount and with any precedent)? Does it just put the gift amount at risk (e.g. $500 and $5000 in the above examples)?
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Gill »

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Last edited by Gill on Fri May 14, 2021 7:58 am, edited 3 times in total.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by bsteiner »

In addition to asset protection, #1 raises Federal income tax, state income tax, estate tax and GST tax issues.

In #2, the trustees could lend the beneficiary the $5,000 rather than distributing it.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by bostondan »

bsteiner wrote: Fri May 14, 2021 7:49 am In addition to asset protection, #1 raises Federal income tax, state income tax, estate tax and GST tax issues.
That certainly makes sense that it could cause problems, but I could not seem to find any hard evidence to say that it actually does cause problems. Is there any resource that actually gives more information on this? I can imagine the following issues with your points, but I am obviously not a lawyer and just trying to think it through. I would appreciate if someone could tell me where my logic is incorrect (since I assume I am missing something).

1. Asset protection: Perhaps this is considered comingling of assets? Or perhaps if the beneficiary pays the taxes, even if considered a gift, it could be seen as "piercing the veil" and give the appearance that the trust assets are being used as personal assets in a manner more similar to a grantor trust (or just a non-trust account)?

2. Estate tax: I know there is a 3 year look back period for gifts when considering estate tax. Is that the only issue with respect to estate tax? That money put in the trust within 3 years of the beneficiaries death would then be considered part of the estate for estate tax purposes?

3. GST tax: I assume this is because trusts can be considered to be skip persons for the purpose of GST tax? If I recall, there is an annual exemption to the GST tax per person, just like the gift tax. If that is the case, then wouldn't a small transfer, like $500 or $5000, not necessarily pose an issue?

4. Federal and state income tax: I'm not immediately seeing what issues this would create for federal and state income tax. If the trust had not made any distributions, then all taxes would be the responsibility of the trust and the tax payment could be considered a gift. With personal income taxes, you can pay somebody else's taxes if you want and it is not taxable income as long as it is a gift. If a corporation pays the taxes of an employee then it is considered taxable income, but that is because it is for work that employee has done.
bsteiner wrote: Fri May 14, 2021 7:49 am In #2, the trustees could lend the beneficiary the $5,000 rather than distributing it.
This makes sense. How formal do these types of loans need to be? I recall my mother loaning money to my grandmother, which my mother was then allowed to reclaim before the rest of my grandmother's assets went towards covering nursing home expenses and ultimately Medicaid took over. The loan was printed on a single piece of paper in layman's terms with an expected date for it to be paid back by. It had essentially no legalese and was signed by my grandmother. Medicaid fully accepted that.

Could a basic loan from a trust to a beneficiary be similarly simple? Again, no plan for this to be done personally, but mostly just curious about how this works.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Lee_WSP »

Let me try and illustrate the legal absurdity of the question posed.

How do you gift yourself something? Likewise, how do you steal from yourself?

A trust is a fiduciary relationship, not a person or business. The beneficiary owns equitable title to the assets held in trust. The trustee holds legal title in trust for beneficiary.

How then, would beneficiary gift to him/herself anything?
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by bostondan »

Lee_WSP wrote: Fri May 14, 2021 11:49 am Let me try and illustrate the legal absurdity of the question posed.

How do you gift yourself something? Likewise, how do you steal from yourself?

A trust is a fiduciary relationship, not a person or business. The beneficiary owns equitable title to the assets held in trust. The trustee holds legal title in trust for beneficiary.

How then, would beneficiary gift to him/herself anything?
Okay, that makes sense. It seems that a transfer from a beneficiary INTO a trust, or a fee/tax paid on behalf of the trust, should not be referred to as a gift then.

I'm not sure my question is absurd though. From a practical standpoint it seems like something people would consider doing. I have been asked this question more than once by peers and I am not an attorney. If they are asking me, a non-attorney, then it must come up occasionally and have a more clear cut answer. I did not know the answer to the question that I originally asked, and have previously told people I did not know the answer, but it is what prompted me to ask the question here.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Lee_WSP »

bostondan wrote: Fri May 14, 2021 12:31 pm
Lee_WSP wrote: Fri May 14, 2021 11:49 am Let me try and illustrate the legal absurdity of the question posed.

How do you gift yourself something? Likewise, how do you steal from yourself?

A trust is a fiduciary relationship, not a person or business. The beneficiary owns equitable title to the assets held in trust. The trustee holds legal title in trust for beneficiary.

How then, would beneficiary gift to him/herself anything?
Okay, that makes sense. It seems that a transfer from a beneficiary INTO a trust, or a fee/tax paid on behalf of the trust, should not be referred to as a gift then.

I'm not sure my question is absurd though. From a practical standpoint it seems like something people would consider doing. I have been asked this question more than once by peers and I am not an attorney. If they are asking me, a non-attorney, then it must come up occasionally and have a more clear cut answer. I did not know the answer to the question that I originally asked, and have previously told people I did not know the answer, but it is what prompted me to ask the question here.
I said legal absurdity. Only other lawyers and legal scholars would understand the impossibility of gifting/stealing from yourself. If I truly thought the question absurd, I wouldn't have bothered to answer.

Edit: btw, I only used absurd because I couldn't think of a better word. Impossibility might be better.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Gill »

Lee_WSP wrote: Fri May 14, 2021 1:22 pm I said legal absurdity. Only other lawyers and legal scholars would understand the impossibility of gifting/stealing from yourself. If I truly thought the question absurd, I wouldn't have bothered to answer.

Edit: btw, I only used absurd because I couldn't think of a better word. Impossibility might be better.
I'm another lawyer but far from a "legal scholar" but I disagree with what you are saying. As bsteiner opined, it may be unwise for a beneficiary to make a gift to an irrevocable trust I don't see where it is legally impossible. If A holds assets in trust for B with income to B and remainder to C, I have always understood if B makes a gift to the trust it constitutes a gift to C subject to B's life interest. Why is that impossible and a "legal absurdity"?
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Lee_WSP »

Gill wrote: Fri May 14, 2021 1:54 pm
Lee_WSP wrote: Fri May 14, 2021 1:22 pm I said legal absurdity. Only other lawyers and legal scholars would understand the impossibility of gifting/stealing from yourself. If I truly thought the question absurd, I wouldn't have bothered to answer.

Edit: btw, I only used absurd because I couldn't think of a better word. Impossibility might be better.
I'm another lawyer but far from a "legal scholar" but I disagree with what you are saying. As bsteiner opined, it may be unwise for a beneficiary to make a gift to an irrevocable trust I don't see where it is legally impossible. If A holds assets in trust for B with income to B and remainder to C, I have always understood if B makes a gift to the trust it constitutes a gift to C subject to B's life interest. Why is that impossible and a "legal absurdity"?
Gill
Unless there's a remainder beneficiary, who is the gift going to? But I said you can't gift to yourself. I said nothing about gifting to the trust.

I suppose impossible is not a good term either.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Gill »

Lee_WSP wrote: Fri May 14, 2021 2:07 pm
Gill wrote: Fri May 14, 2021 1:54 pm
Lee_WSP wrote: Fri May 14, 2021 1:22 pm I said legal absurdity. Only other lawyers and legal scholars would understand the impossibility of gifting/stealing from yourself. If I truly thought the question absurd, I wouldn't have bothered to answer.

Edit: btw, I only used absurd because I couldn't think of a better word. Impossibility might be better.
I'm another lawyer but far from a "legal scholar" but I disagree with what you are saying. As bsteiner opined, it may be unwise for a beneficiary to make a gift to an irrevocable trust I don't see where it is legally impossible. If A holds assets in trust for B with income to B and remainder to C, I have always understood if B makes a gift to the trust it constitutes a gift to C subject to B's life interest. Why is that impossible and a "legal absurdity"?
Gill
Unless there's a remainder beneficiary, who is the gift going to? But I said you can't gift to yourself. I said nothing about gifting to the trust.

I suppose impossible is not a good term either.
First of all, doesn't every trust have a remainderman unless it's a perpetual trust? Aside from that, making a gift to the trust is not making a gift to himself because he only is an income beneficiary in my illustration. You should have been, or maybe you are, a law professor with some of the arcane legal arguments you come up with. The original question of the OP was if a beneficiary could make a gift to an irrevocable trust. The answer is clearly in the affirmative.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Lee_WSP »

Gill wrote: Fri May 14, 2021 2:27 pm
Lee_WSP wrote: Fri May 14, 2021 2:07 pm
Gill wrote: Fri May 14, 2021 1:54 pm
Lee_WSP wrote: Fri May 14, 2021 1:22 pm I said legal absurdity. Only other lawyers and legal scholars would understand the impossibility of gifting/stealing from yourself. If I truly thought the question absurd, I wouldn't have bothered to answer.

Edit: btw, I only used absurd because I couldn't think of a better word. Impossibility might be better.
I'm another lawyer but far from a "legal scholar" but I disagree with what you are saying. As bsteiner opined, it may be unwise for a beneficiary to make a gift to an irrevocable trust I don't see where it is legally impossible. If A holds assets in trust for B with income to B and remainder to C, I have always understood if B makes a gift to the trust it constitutes a gift to C subject to B's life interest. Why is that impossible and a "legal absurdity"?
Gill
Unless there's a remainder beneficiary, who is the gift going to? But I said you can't gift to yourself. I said nothing about gifting to the trust.

I suppose impossible is not a good term either.
First of all, doesn't every trust have a remainderman unless it's a perpetual trust? Aside from that, making a gift to the trust is not making a gift to himself because he only is an income beneficiary in my illustration. You should have been, or maybe you are, a law professor with some of the arcane legal arguments you come up with. The original question of the OP was if a beneficiary could make a gift to an irrevocable trust. The answer is clearly in the affirmative.
Gill
Alright, let's go into the weeds. (aside: we both know that academia is not a realistic possibility unless you're one of the lucky few; besides I did not actually like law review much)

I'm not entirely sure that you can actually transfer assets into an irrevocable trust. The beneficiary is not the grantor and even if beneficiary was the grantor, the only clause I can think of off the top of my head that allows a grantor to transfer in further assets in trust is an intentionally defective clause.

Since it is a fiduciary relationship, I'm not quite sure that a beneficiary (not being a party to the grantor/trustee relationship) actually can transfer assets to the trustee to hold in trust for grantor.

I could be wrong, I'm just going off the top of my head on this one.

edit: I suppose the trustee might be able to do it, but I'm scratching my head as to the actual mechanism. I suppose the trust documents don't explicitly disallow acceptance of gifts. It's an odd question....
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Gill »

No mas.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Luckywon »

Lee_WSP wrote: Fri May 14, 2021 2:56 pm
Since it is a fiduciary relationship, I'm not quite sure that a beneficiary (not being a party to the grantor/trustee relationship) actually can transfer assets to the trustee to hold in trust for grantor.

I could be wrong, I'm just going off the top of my head on this one.

edit: I suppose the trustee might be able to do it, but I'm scratching my head as to the actual mechanism. I suppose the trust documents don't explicitly disallow acceptance of gifts. It's an odd question....
My own trust references California Probate Code 16221:

The trustee has the power to accept additions to the property of the trust from a settlor or any other person.

If a given trust references a similar probate code couldn't this authorize the trustee to accept a gift from anyone?
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Lee_WSP »

Luckywon wrote: Fri May 14, 2021 3:14 pm
Lee_WSP wrote: Fri May 14, 2021 2:56 pm
Since it is a fiduciary relationship, I'm not quite sure that a beneficiary (not being a party to the grantor/trustee relationship) actually can transfer assets to the trustee to hold in trust for grantor.

I could be wrong, I'm just going off the top of my head on this one.

edit: I suppose the trustee might be able to do it, but I'm scratching my head as to the actual mechanism. I suppose the trust documents don't explicitly disallow acceptance of gifts. It's an odd question....
My own trust references California Probate Code 16221:

The trustee has the power to accept additions to the property of the trust from a settlor or any other person.

If a given trust references a similar probate code couldn't this authorize the trustee to accept a gift from anyone?
Looks like the Uniform Trust Code allows the trustee to accept or reject additions to property from settlor or any other person.

Which makes sense, it seems like something people might want to do but the common law doesn't create a mechanism for.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Gill »

Lee_WSP wrote: Fri May 14, 2021 3:30 pm

...but the common law doesn't create a mechanism for.
Say you. Citations please.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Lee_WSP »

Gill wrote: Fri May 14, 2021 4:08 pm
Lee_WSP wrote: Fri May 14, 2021 3:30 pm

...but the common law doesn't create a mechanism for.
Say you. Citations please.
Gill
Which common law would you like me to cite to? The first restatement? The English common law?

C'mon Gill, a trust relationship is a fiduciary relationship between the settlor and the trustee for the benefit of the beneficiary. How can a third party enter into that relationship?

Okay, let's go back to Knight v Knight (1840) 49 ER 58. It requires certainty of property. How can property be certain if the trustee is allowed to accept additions to the property held in trust. It provides that if the property is not certain, then the property must revert back to the settlor.

Restated, the overall property going into trust must be clear.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Luckywon »

Lee_WSP wrote: Fri May 14, 2021 2:56 pm

Since it is a fiduciary relationship...

I've seen this definition of a trust mentioned in a couple of threads recently.

Although trust property is in fact titled to the trustees, stating that a trust is not an entity really seems to me to be a semantic exercise that detracts from an understanding of how trusts function. How does one explain how trusts have EIN's and file tax returns?
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Lee_WSP »

Luckywon wrote: Fri May 14, 2021 4:26 pm
Lee_WSP wrote: Fri May 14, 2021 2:56 pm

Since it is a fiduciary relationship...

I've seen this definition of a trust mentioned in a couple of threads recently.

Although trust property is in fact titled to the trustees, stating that a trust is not an entity really seems to me to be a semantic exercise that detracts from an understanding of how trusts function. How does one explain how trusts have EIN's and file tax returns?
The IRS specifically classifies them as entities for tax purposes, but specifically states they are creations of state statute.

https://www.irs.gov/charities-non-profi ... tate%20law.

https://www.irs.gov/pub/irs-tege/eotopica03.pdf
page 4 (6 of the PDF)

See restatement 2nd of trusts (cited & quoted in the IRS pub so you don't have to look it up)

And also Reg. 301.7701-4(a) (also quoted so you don't have to look it up)
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Luckywon »

Lee_WSP wrote: Fri May 14, 2021 4:29 pm
Luckywon wrote: Fri May 14, 2021 4:26 pm
Lee_WSP wrote: Fri May 14, 2021 2:56 pm

Since it is a fiduciary relationship...

I've seen this definition of a trust mentioned in a couple of threads recently.

Although trust property is in fact titled to the trustees, stating that a trust is not an entity really seems to me to be a semantic exercise that detracts from an understanding of how trusts function. How does one explain how trusts have EIN's and file tax returns?
The IRS specifically classifies them as entities for tax purposes, but specifically states they are creations of state statute.

https://www.irs.gov/charities-non-profi ... tate%20law.

https://www.irs.gov/pub/irs-tege/eotopica03.pdf
page 4 (6 of the PDF)

See restatement 2nd of trusts (cited & quoted in the IRS pub so you don't have to look it up)

And also Reg. 301.7701-4(a) (also quoted so you don't have to look it up)
I see that. Interesting stuff, thank you for the response.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Lee_WSP »

Luckywon wrote: Fri May 14, 2021 4:34 pm
Lee_WSP wrote: Fri May 14, 2021 4:29 pm
Luckywon wrote: Fri May 14, 2021 4:26 pm
Lee_WSP wrote: Fri May 14, 2021 2:56 pm

Since it is a fiduciary relationship...

I've seen this definition of a trust mentioned in a couple of threads recently.

Although trust property is in fact titled to the trustees, stating that a trust is not an entity really seems to me to be a semantic exercise that detracts from an understanding of how trusts function. How does one explain how trusts have EIN's and file tax returns?
The IRS specifically classifies them as entities for tax purposes, but specifically states they are creations of state statute.

https://www.irs.gov/charities-non-profi ... tate%20law.

https://www.irs.gov/pub/irs-tege/eotopica03.pdf
page 4 (6 of the PDF)

See restatement 2nd of trusts (cited & quoted in the IRS pub so you don't have to look it up)

And also Reg. 301.7701-4(a) (also quoted so you don't have to look it up)
I see that. Interesting stuff, thank you for the response.
No problem.

For what it's worth. I completely agree with you in that they more or less function within the economy like an LLC or some other business entity whose shareholders are the beneficiaries (or something like that). However, to say that they are remotely similar is a severe disservice to the law of trusts. IMO.

It's a very very dense legal topic. The restatement of trusts covers three volumes, and the trust portion is actually only a section of the law of property.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by bostondan »

Well then... I am officially more confused than before I asked my question! :shock:
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by Lee_WSP »

bostondan wrote: Fri May 14, 2021 8:16 pm Well then... I am officially more confused than before I asked my question! :shock:
Sorry.

The answer to the question as to the ability to make the transfer is probably yes. Most states have adopted the UTC in whole or mostly.

Whether you should is a different question and I believe the consensus is no.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by bostondan »

Lee_WSP wrote: Fri May 14, 2021 8:19 pm
bostondan wrote: Fri May 14, 2021 8:16 pm Well then... I am officially more confused than before I asked my question! :shock:
Sorry.

The answer to the question as to the ability to make the transfer is probably yes. Most states have adopted the UTC in whole or mostly.

Whether you should is a different question and I believe the consensus is no.
Thanks. That is what I figured. Luckily I was never planning on actually doing any of these things and it was mostly hypothetical from a conversation about trusts with some colleagues.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by TomatoTomahto »

bostondan wrote: Fri May 14, 2021 8:23 pm . . . it was mostly hypothetical from a conversation about trusts with some colleagues.
Maybe you and your colleagues should stick to discussing politics, sex, and religion. :sharebeer
I get the FI part but not the RE part of FIRE.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by finster869 »

As noted above, under the UTC a beneficiary of a trust can add property to it. However, if they do so, the beneficiary is considered the "settlor" of the portion of the trust's corpus they have added which means their contribution may be reached by their creditors. See Section 505 ("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 may not exceed the settlor's interest in the portion of the trust attributable to that settlor's contribution.") So, there is no asset protection advantage to a beneficiary's adding property to an existing trust.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by bostondan »

finster869 wrote: Sat May 15, 2021 11:13 am As noted above, under the UTC a beneficiary of a trust can add property to it. However, if they do so, the beneficiary is considered the "settlor" of the portion of the trust's corpus they have added which means their contribution may be reached by their creditors. See Section 505 ("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 may not exceed the settlor's interest in the portion of the trust attributable to that settlor's contribution.") So, there is no asset protection advantage to a beneficiary's adding property to an existing trust.
Thank you. This seems to answer my question directly. It is allowed, but the protection for that specific amount of assets will be lost. Or at least that is my interpretation of what you just wrote.
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Re: Can a beneficiary give a gift to an irrevocable trust?

Post by finster869 »

bostondan wrote: Sat May 15, 2021 11:19 am
finster869 wrote: Sat May 15, 2021 11:13 am As noted above, under the UTC a beneficiary of a trust can add property to it. However, if they do so, the beneficiary is considered the "settlor" of the portion of the trust's corpus they have added which means their contribution may be reached by their creditors. See Section 505 ("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 may not exceed the settlor's interest in the portion of the trust attributable to that settlor's contribution.") So, there is no asset protection advantage to a beneficiary's adding property to an existing trust.
Thank you. This seems to answer my question directly. It is allowed, but the protection for that specific amount of assets will be lost. Or at least that is my interpretation of what you just wrote.
EXACTLY!
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