Before closing or dissolving a trust, the trustee must complete all steps in the trust administration process. This includes paying all financial obligations, distributing trust property to beneficiaries, filing final tax returns, and providing a final trust accounting. In order for a trust to end, all debts must be paid and all trust property must be distributed.
After the trustee has completed all actions required to administer the trust and there are no remaining assets in the trust except sufficient funds to pay any final expenses, the trustee may close the trust. The first step in determining how to close a trust is to review the trust document thoroughly. If the trust document contains any provisions regarding closing the trust, the trustee should comply with those provisions.
To the extent the trust is silent on this issue, the following are basic steps to close a trust that has been administered:
1. Send written notice to the beneficiaries and any other interested parties indicating the trust is being dissolved as of a certain date and the trustee is resigning at that time. Note: if you have not already obtained signed documents from the beneficiaries acknowledging they received their distributions from the trust, it is a good idea to do so before closing the trust.
2. Prepare a written document indicating the trust will be closed or dissolved on a certain date. Include pertinent information, such as the full legal name of the trust, the date the trust was created, the place the trust agreement was executed, and the names of the grantors or settlors. Sign the document as trustee. Store this document with other trust records, such as the original trust document. If questions arise at a later date regarding the status of the trust, this document will serve as a written record it was dissolved.
3. Contact the IRS to close the tax identification number or EIN for the trust.
4. Depending on the type of trust and applicable state laws, the steps necessary to dissolve a trust may vary. Consult an attorney to ensure all requirements for closing the trust have been met.
Closing a Trust Account
Many first time trustees make the mistake of assuming closing the trust account is sufficient to end the trust. This is not the case. While all accounts titled in the name of the trust should be closed and all trust property should be distributed or transferred out of the trust prior to the trust's end date, closing a trust account is only one part of the process of ending a trust.
To protect against liability, the trustee should carefully document all steps taken to close the trust and store trust records securely after administration.
A comprehensive guide for trustees that covers trust termination in detail is Your Trustee Duties: How to Dissect a Trust Contract, Prepare Form 1041, Distribute Income and Principal to Beneficiaries, and Terminate the Trust (Series 300: Retirees & Estates).
How to Revoke a Living Trust
If you made a revocable living trust as part of your estate plan but your objectives or circumstances have changed, you may wish to remove your living trust from your estate plan. Unfortunately, this is not as easy as simply tearing up your living trust documents. For information on the steps involved, see how to revoke living trust.
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