Can You Break a Family Trust?

You can break a family trust, but that doesn’t necessarily mean you should. A family trust is a legal arrangement that enables grantors to create a legacy for their family, including minor children. You can use it to transfer assets and property to your descendants for decades to come while minimizing tax obligations as much as possible. Celebrities such as Paris Hilton, Nicole Richie and Princes William and Harry are examples of people who have benefited from such trusts.

But family trusts aren't foolproof. Beneficiaries might show irresponsible behavior that makes you reconsider your decision to share your assets. The structure of a family real estate trust or any other trust you create may become problematic if your circumstances change. So it’s better to break the family trust or amend it if your situation changes.

Trusts can be revocable or irrevocable, according to HG.org, and each works differently. How you break a family trust depends on which it is. Each type of trust has different procedures for doing so.

It can also affect the process of breaking the family trust if the grantor is no longer in a position to legally make that decision.

The American Bar Association explains that you can amend a revocable trust whenever you desire, but you would first have to obtain the family trust revocation form suitable for your state. It’s important to ensure that the form contains all the relevant information, such as the grantor or settlor name, assets within the trust, trust name and creation date and explicit instructions to return the trust assets to the grantor. You must also include the names of all other parties concerned.

If you intend to revoke just a few trust articles, you must specify what they are. The signing should be witnessed by a notary public to validate the revocation. The trustee or grantor of the trust must provide the beneficiaries with a written revocation notice.

The trustee must also sign an assignment form to deed the trust assets back to their original owner, and the grantor must append their signature to complete the transfer process.

An irrevocable trust reduces the grantor’s taxable estate, but it has the disadvantage of being very difficult to alter or undo. The American College of Trust and Estate Counsel states that you can use a few methods to break an irrevocable trust as the grantor or trustee.

You could talk to all the family trust beneficiaries and inform them of your decision to break the trust. You can begin the measures to break the trust like the revocation trust once you get their written agreements. In the case of minor children, their legal representatives may have to give you consent. You may also need the written consent of the family trust’s trustee in some states.

Your next option is to seek court intervention if the named parties refuse to agree on the way forward. You must provide the court with evidence as to why the family trust must be revoked.

For example, the trustee might argue that the grantor was not mentally competent when creating the trust. Other reasons might include the death of one or more beneficiaries or the dissolution of a charitable organization named as a beneficiary. You'll obtain a court order that directs the family trust to be broken and the assets distributed as required if the court agrees with your argument.

There may be times when you want to change the terms of the family trust rather than break it up altogether. You have several options in this case as well.

Modifying a family trust is a matter of completing and notarizing a revocable family trust amendment form. You must include all the relevant details, such as the parties involved, the trust’s original date and any trust articles you wish to change. Get the document notarized.

The second alternative is to create a second family trust that is more suitable for your situation. Then you can wind up the first trust and transfer your assets from there to the second one.

The trouble occurs when dealing with an irrevocable family trust. You must think outside the box if the beneficiaries don’t agree with each other and the courts don’t favor you. You could potentially decant the trust in this case.

As a trustee of an irrevocable family trust, you could move the assets legally into a new or preexisting trust with better terms for everyone concerned. You can even create different trusts for each beneficiary, giving them more flexibility. But you must be legally authorized in the original trust document or allowed by state law to do so.

Decanting a trust is worth considering for successor trustees who take over a revocable trust when the grantor dies or becomes incapacitated, but they should be careful not to become liable for any mistakes they make during the process.