How to Terminate an Irrevocable Trust

The grantor of an irrevocable trust relinquishes control over the assets contained within that trust in exchange for substantial tax savings and asset protection. The trade-off is that, once it's created, such a trust is difficult to terminate without the cooperation of all the parties involved. Whether you are the grantor, the trustee, or a beneficiary, you may have decided that you want to terminate an irrevocable trust. Recent changes to both legislation and case law have made it easier to do so. State laws vary, but some tips can help you determine if your irrevocable trust can be terminated.

Instructions

1. 

   If all the parties agree, you may be able to terminate an irrevocable trust.

   Determine if all the parties involved can agree to terminate the irrevocable trust. Most states allow for the termination of an irrevocable trust if the grantor, trustee and beneficiaries are in agreement. Agreement may be hard to obtain if the beneficiaries stand to lose their interest in the assets contained within the trust. Even if the parties agree to terminate the trust, they will still need to petition the court.

2. 

   Language within the trust may allow for its termination.

   Read the irrevocable trust to determine if there are provisions that allow for its termination under certain circumstances. Newer irrevocable trusts are written with provisions that allow for changes or termination of the trusts. These provisions will be specific in regard to how they can be called into action. A common provision would allow for modifications to the trust in light of changes to federal law. Provisions that enable the trust to be terminated may have been written into the irrevocable trust. Using such a provision, you can petition the court to terminate the trust.

3. 

   A final accounting is the last thing to be done before a completed trust can be terminated.

   Determine if the objectives of the irrevocable trust have been achieved. Irrevocable trusts come with their own taxpayer ID numbers. As such, the trustee is often unsure how to terminate the trust once its objectives have been achieved. Once the assets have been distributed to the beneficiaries, a final account needs to be filed with the court. Your county courthouse will be able to advise you how to file the termination of the trust once you determine that the trust objectives have been achieved.

4. 

   Sometimes a trust is emptied before its objectives can be completed.

   Determine if the irrevocable trust has lost some or all of its value. Sometimes a trust simply runs out of funds and is empty. For example, if a life insurance policy names a trust as its beneficiary but the insured fails to make payments, causing the policy to lapse, then the trust becomes empty and, therefore, subject to termination. Again, a petition will have to be made with the court.

5. 

   Sometimes the trust's assets have lost their value, making the trust unsustainable.

   Determine if the trust is still viable and beneficial. Sometimes a trust ceases to be beneficial, or cannot fulfill the purposes for which it was created. An example would be a trust for which the maintenance, such as rental property which must comply with stringent new tenancy laws, is too costly or arduous. Such trusts can be terminated by the court even if the beneficiaries do not consent.

6. 

   You don't have to live with a trust that contains an error.

   Determine if the trust contains a drafting mistake. Most states allow for any contract to be revoked if it does not fulfill the intention of the parties. On occasion, a trust may even name the wrong beneficiary. If the irrevocable trust contains a drafting error or false statement, then the court may agree to terminate it.

Tips & Warnings

• Irrevocable trusts are dictated by both state law and case law. Choose an attorney who is familiar with the most recent cases involving irrevocable trusts.

References

• Lawyers: Modifying or Terminating a Trust
• Calhoun County Courts, Michigan: May the Court Terminate a Trust When There Is Not Consent of All Beneficiaries?
• US Legal Answers: To Terminate the Now Irrevocable Trust What Froms Are Necessary?