Nothing lasts forever. While trusts can stretch across generations and keep valuable money and property within a family, no trust has unlimited funds or an interminable time horizon. Every trust, at some point, will end.
The reasons why a trust might terminate can vary, but in general, termination occurs because the trust has accomplished its purpose, is no longer economically feasible, has distributed all of its property, is revoked, or is dissolved by the court because of a dispute or an illegality.
A trust is a legal arrangement in which one person (the trustmaker) places their property in a trust and appoints someone (a trustee) to hold title to and manage trust property for the benefit of one or more people (the beneficiaries). The property placed in a trust can be money, real estate, securities, business interests, insurance policies, and other types of assets.
When a trustmaker forms a trust, they can make it revocable, i.e., they can modify or terminate it while they are still alive and competent. A trust can also be irrevocable, meaning that the trustmaker cannot modify or terminate the trust during their lifetime except under a limited number of circumstances. Revocable trusts typically become irrevocable when the trustmaker dies.
When Trusts Terminate According to Plan
Trusts are set up with a specific purpose in mind, namely, to distribute money and property to beneficiaries. The most straightforward reason that a trust might end is that all of the money and property in the trust have been distributed. At that point, the trust has outlived its usefulness and may be closed.
Age or Date Termination
The amount of time it takes to distribute all of a trust's money and property can depend on its terms. Trust creators sometimes insert clauses that specify the age when a beneficiary is to receive trust property. They might include language, for example, that property is to be transferred to a beneficiary only when they reach age 25. The terms could also be more nuanced, such as the beneficiary receiving 1/3 of the trust property at age 25, 1/2 of the remainder at age 35, and the entire remaining amount at age 45.
Similarly, the trust creator could insert language stating that the trust automatically terminates on a specified date.
Instead of specifying a certain beneficiary age or future date that triggers the trust's termination, the creator might include a certain event (or events) that require the trust to end. The event could be the beneficiary's graduation from college, marriage, divorce, or birth of a child. However, a triggering event that places unreasonable restraints on marriage or encourages divorce may be considered invalid.
If the trust is revocable, the trustmaker can decide to revoke it at any time and for any reason while they are still alive and competent. However, even irrevocable trusts can be revoked for reasons explored below.
When Unforeseen Circumstances Force Trust Termination
A trust typically wraps up after it has served its purpose of distributing money and property to beneficiaries according to its terms. But sometimes contingencies arise that force the termination or modification of the trust. The court may intervene in such occasions.
Trust Termination by Trustee or Beneficiaries
The trustee can revoke the trust if the trustmaker has expressly granted them authority to do so. If a trustee wishes to terminate a trust but lacks the necessary authority, they can petition the court for a judicial termination. Trust beneficiaries may do the same. The court may order the trust's termination if the court is convinced that termination will not interfere with the trust's original purpose.
The Trust Is No Longer Economically Feasible
Administering a trust costs money—usually about 1% to 3% of the trust's total value per year. The interested parties might agree that trust administration costs outweigh the benefits of the trust to the beneficiaries. The trustee and the beneficiaries could then petition the court to terminate the trust. Because a negative cost-to-benefit ratio can be a concern in some situations, the trust may even include a provision that allows it to be terminated if it is no longer economically feasible.
As with wills, trusts can be challenged, or “contested.” Often, a trust contest results from a dispute among the beneficiaries. There could also be a dispute between the beneficiaries and the trustee, or somebody who believes they should have been a beneficiary could contest the trust.
Whatever the reason for a trust contest, such disputes usually end up in court. The court could order the trust's termination and the immediate distribution of its property to its beneficiaries. On the other hand, the court could place the property in a new trust, modify the trust's terms, or appoint a new trustee.
Terminating a Trust for Legal Reasons
A court may deem the trust illegal or invalid and may terminate it. Trusts cannot be created for illegal purposes, such as defrauding creditors, depriving a spouse of their rightful elective share, or operating an illegal business. Generally, a trust will be terminated if its purposes become unlawful or contrary to public policy. Note that some triggering events, such as unreasonably restraining a beneficiary's marriage, could be considered prohibited as against public policy.
In addition, the trustmaker must be legally competent to create a trust. A court can terminate a trust if it determines that the trust was created under duress, through fraud, or by mistake, or if the creator was not of sound mind when they created it. These arguments may be put forth as part of a trust contest.
The end of a trust signals the end of an era. Even when a trust has simply outlived its usefulness and expires without controversy, a beneficiary or trustee might have questions about how trust termination affects their rights and responsibilities. When parties with an interest in a trust are not in agreement about its termination, the process can become more complicated. At the very least, a record of the trust's closure should be preserved. An estate planning attorney can help with these and other trust-related issues.
If you have questions about closing a trust, call or contact our office to speak with our experienced estate planning lawyer.