At some point a trust might terminate . While trusts can stretch across generations and keep money and property within a family, no trust has unlimited funds or will last an unlimited amount of time.
A trust might terminate because:
- The trust has accomplished its intended purposes.
- It is no longer economically feasible to have a trust.
- The trust has distributed all of its property and assets.
- The trust is revoked.
- The court dissolves the trust because of a dispute or illegality.
What is a trust?
A trust is a legal arrangement in which one person (a trustmaker) places property and assets into a trust and appoints another person (a trustee) to manage the trust property for the benefit of the recipients (beneficiaries).
Trustmakers may choose to put any of the following in a trust:
- Real property
- Business interests
- Insurance policies
- Other assets
Trusts may be revocable or irrevocable:
- Revocable: The trustmaker can modify or terminate the trust while they are alive and competent to make changes. Revocable trusts usually become irrevocable when the trustmaker dies.
- Irrevocable: The trust maker cannot change their trust during their lifetime, except in a few exceptional circumstances.
Planned Reasons for a Trust to Terminate
A trust may terminate because it has met its goals. It has distributed the trust property and assets to the beneficiaries, and there is no further need for it to exist. Several circumstances or triggers may cause the trust to distribute all its property to its beneficiaries and be terminated.
Age or Date Triggers
The trust creator can specify that the property and assets be distributed to the beneficiaries when they reach a certain age or on a certain date. They may also distribute the property and assets in phases, so a beneficiary does not receive everything at once.
The trust creator may tie the distribution of trust property and assets to a certain event instead of an age or date. For example, the trust may distribute assets to beneficiaries upon:
- Graduating from high school or college
- Having a child
- Getting married
- Getting a divorce
Of course, a trust that places unreasonable restraints on a beneficiary’s choices for marriage or divorce may be considered invalid.
Unplanned Reasons for a Trust to Terminate
Sometimes unforeseen circumstances may force a trust to be modified or terminated. Frequently, a court is involved in these cases.
Beneficiaries or Trustee May Force Trust Termination
Trustees can revoke the trust if the trust maker has given them that authority. In addition, trustees and beneficiaries can petition the court for judicial termination. The court may order the trust to be terminated as long as termination does not interfere with the original purpose of the trust.
The Trust Runs Out of Money
It costs between 1% and 3% of the trust’s total value to administer it each year. If the interested parties agree that the costs to keep the trust are higher than the benefits the beneficiaries receive, they may agree to terminate the trust. If the trust has a proviso that allows it to be terminated when it is no longer economically feasible to keep it going, it can be terminated. Otherwise, the trustee and beneficiaries will need to petition the court to terminate the trust.
The Trust is Contested
Like a will, a trust can be contested. Often, a trust contest results from a dispute among beneficiaries, between the beneficiaries and the trustee, or by someone who believes they should have been a beneficiary.
Usually, these disputes go to court. The court could:
- Terminate the trust and immediately distribute the trust’s property to the beneficiaries.
- Place the trust property in a new trust.
- Modify the trust’s terms.
- Appoint a new trustee.
Legal Reasons for Terminating a Trust
If the court determines that the trust is illegal or invalid, it may terminate it.
Examples of illegal reasons to establish a trust:
- Defrauding creditors.
- Depriving a spouse of their rightful elective share.
- Operating an illegal business.
Examples of situations that can make a trust invalid:
- The trustmaker is not legally competent to create a trust.
- The trust was created under duress, through fraud, or by mistake.
If you have created a trust or are a trustee or beneficiary and unsure about whether the trust should be terminated or want to better understand how terminating a trust will affect your rights and responsibilities, contact us for help.
You can schedule a call with us or reach us directly at 855.631.3457 to learn more about how best to plan today to protect those most important to you.