Trusts are designed to terminate after the purposes of the trust have been fulfilled. For example, the trust agreement may state that it terminates upon the death of a named beneficiary, when its assets fall below a certain dollar amount, upon the expiration of a set date or after all trust assets are distributed. However, there are circumstances in which the creator of a trust may wish to terminate it before it has fulfilled its purpose or before trust administration is complete. A trustee of a trust may also find it necessary or desirable to terminate a trust. In this article, Pennyborn.com provides a list of steps required to terminate a trust.
Before you can complete the steps to terminate an estate planning trust, you will need to review certain information to understand what is required to terminate the specific trust involved. There are several issues that determine what is required to terminate a trust, including: 1. What type of trust do you want to terminate? For example, is it a revocable living trust or an irrevocable trust? If you are not sure, review our overview of the different types of
estate planning trusts. This may be helpful in identifying the type of trust you have.2. What does the trust agreement say about termination? The trust document may contain language that applies to ending the trust. Trust language is also very important when you are considering the termination of a trust because it provides insight regarding the intent of the person that made the trust, called the settlor. When a court determines whether a trust may be terminated, the settlor's intent is a very important consideration.3. What does state law provide with regard to terminating this type of trust? The state laws applicable to the trust may govern whether you can terminate or modify the trust.4. Is terminating the trust consistent with the material purposes of the trust? If terminating the trust would prevent a material purpose of the trust from being fulfilled, a court may not permit the trust to be terminated. Nevertheless, in some jurisdictions, if there are circumstances that warrant termination of the trust that were not anticipated by the settlor, a court may permit the trust to be terminated anyway.5. Do all beneficiaries and the settlor, if applicable, consent to the trust termination? Although you will need to check the state laws applicable to the trust, it is typically possible to terminate a trust if all trust beneficiaries agree to it and the termination does not conflict with the material purpose of the trust. Of course, like heirs, beneficiaries are not always in agreement. One or more beneficiaries may not agree to terminate the trust. In these circumstances, explore your options with an attorney.In some cases, a trustee that has exhausted other options for terminating a trust may have to seek a court order to terminate the trust. For example, if the trust needs to be terminated on a date earlier than provided in the trust document, and there is a strong basis for such termination, a trustee may have no alternative but to take formal legal action to terminate the trust. A settlor or beneficiary of the trust may also petition the court to terminate a trust in some instances.If you are the settlor, beneficiary or trustee of a trust and wish to terminate it, contact an attorney. Trust law is complex and varies from state to state. Do not make a decision to terminate a trust without first asking an attorney whether the trust can be terminated or changed. If you do not have a lawyer, go to our section on
finding an attorney.
How to Close a Trust
Terminating a trust early is different than closing or ending a trust that has already been administered. For detailed instructions and a list of steps required to close a trust after administration, review our section on how to end a trust.
List of Steps to Terminate a Trust
1. Read the trust agreement thoroughly to ensure you comply with provisions for terminating the trust. In order to determine whether you can terminate the trust, you must understand what type of trust is involved. For an overview of different types of estate planning trusts, see more about trusts.2. Consult an estate planning attorney for guidance on how to properly terminate the trust. This is important due to the potential liability associated with actions taken as a trustee. If court approval may be required to terminate the trust based on state law, an ongoing dispute involving the trust or for some other reason, you may need to petition the court for approval to terminate. For information every trustee should know, read for trustees.3. Pay all debts and expenses of the trust. Consult your accountant about whether any amounts need to be held in reserve to pay any final debts and expenses.4. Close trust accounts and transfer title to trust property out of the trust. See Stock Powers.
5. Notify trust beneficiaries and other interested parties that the trust will terminate on a particular date and you are resigning as trustee. Provide a final trust accounting if required.6. Complete paperwork to terminate the trust in accordance with the trust agreement and applicable state law. You can find information on state laws that apply to trusts on our
Trust Law page.7. If the trust has an EIN and has been filing tax returns, ask your CPA or accountant to file any final tax returns and complete any required filings with the IRS. For an overview of tax returns that may need to be filed for the trust, such as IRS Form 1041, Schedule K-1, gift tax returns, and tax returns due for the deceased, refer to our free
Trust Administration Guide.8. Store trust records and files securely. You may need to access trust documents and records at a later date.For more detailed instructions on the steps required to terminate or dissolve a trust, get one of the trust administration guides featured on our
books for trustees page. Whether you have questions about when a trust ends, how to distribute trust assets to beneficiaries, whether you need beneficiaries to sign anything, and how to file final tax returns for a trust, a comprehensive reference manual for trustees will be a good resource to have throughout the process.
Can You Terminate an Irrevocable Trust?
Typically, an irrevocable trust cannot be terminated without the consent of all grantors, donors or settlors of the trust, as well as all beneficiaries. If such consent may be obtained, these parties will all need to sign appropriate documentation to terminate the trust. For an overview of these types of trusts, see irrevocable trusts.If the settlors of the irrevocable trust and the intended beneficiaries do not all agree to terminate it, a court order may be required to terminate the trust. Anyone seeking to terminate an irrevocable trust should consult an experienced trusts and estates attorney regarding the options for terminating the type of trust involved and applicable state law requirements.
How to Revoke a Living Trust
It is very common for people to change their mind after making a living trust. If you made a living trust and want to revoke it, you may want to start by contacting the estate planning lawyer that prepared your trust. Let your attorney know you are interested in revoking the trust. They may be able to help you resolve any issues or concerns. If it is necessary to revoke the trust, your lawyer can advise on the proper steps based on the type of trust you have.For the list of steps required to revoke a living trust, refer to our article on how to revoke a living trust.
When a Trust Runs Out of Money
Many factors determine how long a trust can continue. A trust typically has many expenses, including
trust administration fees and other
fees for professionals that provide services to the trust. When trust funds are invested, the performance of those investments can fluctuate. Distributions and disbursements from the trust may eventually deplete trust funds to the point where it is not feasible for the trust to continue. At this point, the trust may need to be terminated.State laws typically contain provisions allowing a trust to be terminated or changed if trust assets are not sufficient. How low must the value of trust assets be for a trust to be terminated? This depends on several factors, including but not limited to, the terms of the trust, the material purpose of the trust, applicable state law, and the unique circumstances involved. A trust lawyer can advise on whether a particular trust may be terminated if it appears the trust has run out of money.Copyright 2020 Pennyborn.com. ALL RIGHTS RESERVED.This article on how to terminate a trust was updated on February 21, 2020.
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