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Estates & Trusts

Modifying or Terminating a Trust

By October 20, 2016No Comments

Trusts may not live in perpetuity, but they can sure last a long time. During that time, so much can change. Laws can change, your beneficiaries’ needs can change, the state of the economy can change. So many factors can affect whether or not your trust is maximizing its potential and serving its original purpose. The ability to modify or terminate a trust is dependent on the type of trust you have and the language in the trust agreement. Click on the link below to learn more about the flexibility you have in modifying each type of trust, and the steps for terminating a trust.

The language in a trust agreement is key in determining how a trust can be modified or terminated and by whom.  A trust is either revocable or irrevocable and this classification also controls the fate of the trust.

Revocable trusts may be modified at any time by the settlor, the creator of the trust. The trust agreement contains details on the distributions and termination of the trust, and also explicitly states if the trustee may decide to modify or terminate the trust.

Irrevocable Trusts cannot be modified or revoked without a court order and the consent of the settlor and beneficiares. If the settlor is no longer alive, the courts give extensive consideration to the settlor’s intent in setting up the trust, making it difficult for beneficiaries to make arbitrary modifications or terminations. If a modification allows the trust to fulfill the settlors objectives more effectively and efficiently, it will more likely be approved. The courts also have the ability to make a change retroactive to achieve a tax objective. Courts may also approve a termination if keeping the trust does not make economic sense (i.e. the cost to maintain the trust is depleting the value of the assets in a trust with minimal assets remaining).

If no action is taken by the settlor, beneficiaries, and/or trustee, a trust will generally terminate upon the occurrence of a specific event, whether it be when the beneficiary reaches a certain age, or when the settlor dies. However, a trust does not automatically terminate as soon as this event occurs. The trustee and beneficiaries are allowed a reasonable amount of time to perform the duties necessary to complete the administration of the trust. Below are the steps for closing the administration of a trust.

Steps for Closing Trust Administration

  1. Review the provisions for termination in your original trust agreement.
  2. Ensure that all expenses and taxes have been paid and accounted for.
  3. Obtain approval from all beneficiaries concerning the termination of the trust.
  4. Determine the proper owners of the assets within the trust and distribute accordingly.
  5. Request and sign a Revocation of Trust document.

Please feel free to contact your L&B professional with any questions or concerns you may have on this matter.

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