A trust is a great way to ensure you’re protecting your assets and your family after your passing, and you don’t have to be extremely wealthy to benefit from one. However, your family or circumstances may change over time. Here, we’ll cover the types of trusts you could have and what to do if you need to end one.
Revocable vs Irrevocable Trusts
A living trust is a legal agreement that allows you to place your assets under the control of a trustee who will distribute them to your beneficiaries. It should name a trustee, at least one beneficiary, and should include instructions on how to distribute your assets. You’ll then transfer assets, such as real estate, into the trust.
There are two types of living trusts which are known as revocable and irrevocable. A revocable living trust can be ended or amended by the trustor at any time. Irrevocable trusts are more difficult to revoke and the procedures to do so may vary depending on what state you live in. Some states will assume a trust is revocable while others will assume it’s irrevocable, so it’s important to note which your trust is.
Reasons For Terminating a Trust
There are several reasons you may need to end a trust before it has run its course. For starters, your trust assets may decrease in value since its creation. Many states allow a trustee or a trust’s beneficiary to change or terminate a trust that has become too small to administer effectively and are worth less than the cost of administering the trust.
Another reason for terminating a trust is that the reasons for creating the trust are no longer present. Furthermore, people can have more specific reasons for wishing to terminate a trust, such as a change of circumstances, such as the death of a beneficiary, arguments among beneficiaries, or divorce.
Considerations For Irrevocable Trusts
By definition, an irrevocable trust is meant to be set in stone and unchangeable. However, there are some circumstances that may not be appropriate or accurate for it over time. Circumstances like automatic termination or termination by consent, which are usually contingent upon a triggering event such as a death of a trustee or beneficiary, can also be taken into consideration to make it easier to terminate an irrevocable trust.
Should you need to terminate or change an irrevocable trust, you may need consent of all parties and to petition a court for approval of changes. If your parties don’t approve the change, you’ll need an order of the court and to prove that the current trust is no longer in the best interest of the beneficiaries. Trustee or trust protector powers included directly in the trust instrument may also allow an irrevocable trust to be changed for similar reasons; they could make changes to your trust without your consent or approval provided they can prove there are new circumstances that create problems, or that it doesn’t achieve what you originally intended.
Whatever the reasons for wishing to change or terminate an trust, changing or terminating an irrevocable trust can have unintended estate and gift tax implications, so be sure to consult with a legal estate planning lawyer.
The Termination Process
If your circumstances change in any way and you wish to terminate your trust, you must first check the trust instrument for guidance on how to terminate the specific trust, as well as your state’s laws regarding revocable trusts. You’ll need to list all the items you want to include in the cancelation and any specific information individual state laws may require.
Your trust should have a section that addresses dissolution or revocation. You’ll need to state the reason for dissolving your trust on the revocation item list.
Next, you’ll prepare a dissolution document. This will probably vary a bit depending on your state’s requirements and the wording of your trust, but you’ll need to put the name of the trust, the date of its creation, the names of the trustors and the trustees, and a statement indicating revocation of the trust.
The trust assets will need to be put back into the name of the trustor and transferred. For example, if the trust owns a bank account, follow the bank’s procedures to transfer the account back to yourself, or the trustor. A home may need a new deed prepared. Different assets will have different procedures for transfer and retitling, as appropriate.
Then, you, or the trustor, will sign the revocation document in front of a notary. Copies of the notarized revocation document will need to be sent to all parties who had your trust on file or who may be affected, such as your trustees and beneficiaries.
If you need to revoke your living trust, start by contacting the estate planning lawyer that prepared it. Professional legal advice is vital for your future financial wellbeing and your sanity when it comes to these complicated matters. If it is necessary to revoke your trust, your lawyer will advise on the proper steps based on the type of trust you have, and help you resolve any issues or concerns before they escalate.