Alabama § 19-3B-505 - Creditor’s Claim Against Settlor.

§ 19-3B-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) Except as provided in Chapter 3E, 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, then 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.

(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 immediately prior to the settlor’s death is subject to claims of the settlor’s creditors, costs of administering the settlor’s estate, the expenses of the settlor’s funeral and disposal of remains, the homestead allowance, exempt property, and family allowance to a surviving spouse and children, to the extent the settlor’s probate estate is inadequate to satisfy those claims, costs, expenses, and homestead allowance, exempt property, and family allowance.

(b) With respect to claims, expenses, and taxes in connection with the settlement of a trust that was revocable at the settlor’s death:

(1) Any claim of a creditor which would be barred against the fiduciary of a decedent’s estate, the estate of the decedent, or any creditor or beneficiary of the decedent’s estate shall be barred against the trustee, the trust property, and the creditors and beneficiaries of the trust.

(2) A trustee at any time may give notice to any person the trustee has reason to believe may have a claim against the settlor at death. The notice shall contain the name and address of the trustee to whom the claim must be presented. If the person fails to present the claim in writing within 90 days from the date of the notice, then the person shall be forever barred from asserting or recovering on the claim from the trustee, the trust property, and the creditors and beneficiaries of the trust. Any person who presents a claim on or before the date specified in the notice may not later increase the claim following the expiration of the 90-day period.

(3) If a claim is not presented in writing to the personal representative of the settlor’s estate or to the trustee: (i) within six months from the date of the appointment of the initial personal representative of the settlor’s estate; or (ii) if no personal representative is appointed within six months from the settlor’s date of death and a claim is not presented in writing to the trustee within six months from the settlor’s date of death, then no trustee shall be chargeable for any assets that the trustee may pay or distribute in good faith in satisfaction of any lawful claims, expenses, or taxes or to any beneficiary before the claim was presented. A payment or distribution of assets by a trustee shall be deemed to have been made in good faith unless the creditor can prove that the trustee had actual knowledge of the claim at the time of the payment or distribution. The six-month period shall not be interrupted or affected by the death, resignation, or removal of a trustee, except that the time during which there is no trustee in office shall not be counted as part of the period.

(4) The provisions of Section 43-2-371 regarding the priority of payment of claims, expenses, and taxes from the probate estate of a decedent shall apply to a revocable trust to the extent the assets of the decedent’s probate estate are inadequate.

(c) 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;

(2) A beneficiary of an irrevocable trust who holds a power of withdrawal is not a settlor of the trust upon the lapse of the power;

(3) The power of a trustee of an irrevocable trust, whether arising under the trust agreement or any other provision of law, to make a distribution to or for the benefit of a settlor for the purpose of satisfying or reimbursing, in whole or in part, the settlor for income taxes paid or payable on all or any portion of the trust principal and income that are includable in the settlor’s personal income under applicable law, as well as distributions made by the trustee pursuant to such authority, shall not be considered an amount that may be distributed to or for the benefit of the settlor; and

(4) A person, including, but not limited to, a prior settlor of the trust, who becomes a beneficiary of a trust due to the exercise of a power of appointment by someone other than that person, shall not be considered a settlor of the trust.