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How to Terminate an Irrevocable Trust

Updated July 20, 2017

The granter 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 granter, 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.

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 granter, 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.

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.

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.

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.

Determine if the trust is still viable and beneficial. Sometimes a trust ceases to be beneficial, or cannot fulfil 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.

Determine if the trust contains a drafting mistake. Most states allow for any contract to be revoked if it does not fulfil 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.

Tip

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.

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About the Author

Mandy Harris began writing professionally in 2010. Her career has focused on writing informative articles about legal topics to help consumers make knowledgeable decisions. Mandy has been published in Western Michigan's "Calliope" magazine and has ghostwritten numerous articles. She pursued her paralegal studies at Davenport University.