Trusts have evolved to the point where it is common to find at least one trust in the average estate plan. If you are considering the addition of a trust in your plan, or you are the beneficiary of a trust established by someone else, you may find yourself wondering how a trust terminates. Let’s review how a trust can be terminated and whether a beneficiary can terminate a trust.
One reason trusts are so popular is that trusts are extremely flexible, meaning a trust can help achieve a wide range of estate planning goals. Although trusts can be highly specialized to accomplish specific goals, all trusts are fundamentally the same. A trust is a legal relationship where property is held by one party for the benefit of another party. The person who creates a trust is referred to as the “Settlor”, “Trustor” or “Grantor.” The Settlor transfers property to a Trustee, appointed by the Settlor. The Trustee holds that property for the trust’s beneficiaries as well as invests trust assets and administers the trust terms according to the terms created by the Settlor. Trusts all fall into one of two categories – testamentary or living trusts. A testamentary trust is activated by a provision in the Settlor’s Will at the time of death whereas a living trust activates once all formalities of creation are in place and the trust is funded. Living trusts can be further divided into revocable and irrevocable living trusts. Because a testamentary trust is activated by a provision in the Settlor’s Will, and a Will can always be revoked up to the time of the Testator’s death, a testamentary trust is also revocable up to that point.
Terminating a Trust
Several factors will determine how a trust is terminated and who has the authority to terminate the trust. The type of trust you wish to terminate, for example, will determine who has the authority to easily terminate the trust. If the trust is a revocable living trust or a testamentary trust, for example, the Settlor may terminate the trust at any time and for any reason. If, however, the trust is an irrevocable living trust the Settlor does not have the authority to terminate the trust after it is established.
The terms of a trust may also dictate when a trust terminates. A Settlor may include a specific date on which the trust is to terminate or may include a triggering event, after which the trust terminates. For instance, the Settlor might include a term that automatically terminates the trust after the youngest beneficiary reaches the age of majority or following the death of a beneficiary. Certain types of charitable trusts, known as charitable lead and charitable remainder trusts, have a time frame built into the trust, after which the trust terminates, and the remaining assets are distributed to the remainder beneficiary. A Settlor may also give the Trustee the discretion to terminate the trust when the trust purpose has been fulfilled or when the trust assets diminish to a point at which the trust is no longer able to fulfill the trust purpose. If the trust assets are completely depleted, the trust will terminate as well.
Can a Beneficiary Ever Terminate a Trust?
If the Trustee or beneficiaries of a trust wish the trust to be terminated, yet lack the specific enumerated authority to do so, they can always petition a court for a judicial termination of the trust. If the court is convinced that terminating the trust is what the beneficiaries want and doing so will not frustrate or hinder the trust purpose, the court may order termination.
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