Trusts are designed to terminate after the purposes of the trust have been fulfilled. For example, the trust agreement may state that it terminates upon the death of a named beneficiary, when its assets fall below a certain dollar amount, upon the expiration of a set date or after all trust assets are distributed.
However, there are circumstances in which the creator of a trust may wish to terminate it before it has fulfilled its purpose or been administered. A trustee of a trust may also find it necessary or desirable to terminate a trust.
There are several issues that determine what is required to terminate a trust, including:
1. What type of trust?
2. What does the trust agreement say about termination?
3. What does state law provide with regard to terminating this type of trust?
In some cases, a trustee that has exhausted other options for terminating a trust may have to seek a court order to terminate the trust. For example, if the trust needs to be terminated on a date earlier than provided in the trust document, and there is a strong basis for such termination, a trustee may have no alternative but to take formal legal action to terminate the trust. If you are the settlor or trustee of a trust and wish to terminate it, contact an attorney.
Terminating a trust early is different than closing or ending a trust that has already been administered. For information on how to close a trust after administration, see how to end a trust. To learn the steps you can take to revoke a living trust, see how to revoke a living trust.
Important Steps in Terminating a Trust
1. Read the trust agreement thoroughly to ensure you comply with provisions for terminating the trust.
2. Consult an estate planning attorney for guidance on how to properly terminate the trust. This is important due to the potential liability associated with actions taken as a trustee. See for trustees.
3. Close trust accounts and transfer title to trust property out of the trust.
4. Notify trust beneficiaries and other interested parties that the trust will terminate on a particular date and you are resigning as trustee. Provide a final trust accounting if required.
5. Complete paperwork to terminate the trust in accordance with the trust agreement and applicable state law.
6. If the trust has an EIN and has been filing tax returns, ask your CPA or accountant to file any final tax returns and complete any required filings with the IRS.
7. Store trust records and files securely.
Terminating Irrevocable Trusts
Typically, an irrevocable trust cannot be terminated without the consent of all grantors, donors or settlors of the trust, as well as all beneficiaries of the trust. If such consent may be obtained, these parties will all need to sign appropriate documentation to terminate the trust. For an overview of these types of trusts, see irrevocable trusts.
If the creators of the irrevocable trust and the intended beneficiaries do not all agree to terminate it, a court order may be required to terminate the trust. Anyone seeking to terminate an irrevocable trust should consult an experienced trusts and estates attorney regarding the options for terminating the particular type of trust involved and applicable state law requirements. See finding an attorney.