Due in large part to the flexible nature of a living trust, it has become very popular to include at least one living trust in a comprehensive estate plan in recent years. As such, it is likely that you will find yourself involved with a living trust at some point in your life. You may also find yourself wondering when a living trust terminates. To help answer that question, we’ll explain when and how a living trust terminates in California.
What You Need to Know about Living Trusts
It helps to learn some living trust basics before discussing how one terminates 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. This distinction – between revocable and irrevocable – is important when discussing how a living trust terminates.
Terminating a Living Trust
A living trust may terminate several different ways and/or under several different scenarios. Whether or not the Settlor can terminate the trust depends on whether the trust is revocable or irrevocable. If the trust is a revocable living trust, the Settlor can terminate it any time and without needing to provide an explanation. If, however, the trust is an irrevocable living trust the Settlor cannot ever terminate the trust once it is activated.
In an irrevocable living trust, the Settlor may include a term within the trust agreement itself that provides a specific date on which the trust is to terminate. The Settlor may alternatively include a triggering event in the trust agreement that causes the trust to terminate. The marriage of the trust’s only beneficiary, completion of college by a beneficiary, or a beneficiary reaching a designated age are all examples of “triggering” events that might cause a living trust to terminate. The 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. Even if none of these apply, the Trustee and/or beneficiaries can always petition a court to terminate the trust.
Moreover, California Probate Code section 15404(a) allows for an irrevocable living rust to be amended or even terminated “by the written consent of the settlor and all beneficiaries without court approval of the modification or termination.” That section goes on to say that “If any beneficiary does not consent to the modification or termination of the trust, the court may modify or partially terminate the trust upon petition to the court by the other beneficiaries, with the consent of the settlor, if the interests of the beneficiaries who do not consent are not substantially impaired.” In essence, that section provides for the possibility of trust termination even though the trust is irrevocable.
Please download our FREE estate planning checklist. If you have additional questions or concerns about how and when a living trust terminates, contact us at the Northern California Center for Estate Planning & Elder Law to discuss your legal options by calling (916)-437-3500 or by filling out our online contact form.