A trust is an estate management tool that puts one person in charge of a piece of property for the benefit of other people. The person in charge of the property is referred to as a trustee. The individuals who receive the benefit are referred to as beneficiaries. The original owner of the property is referred to as a settlor or trustor.

In order to create a trust, the settlor or trustor drafts will need to draft a trust document that expressly places the property in the care of the trustee. The trust will also expressly name the beneficiaries and the terms of the agreement. Example of property that is commonly the subject of a trust includes real estate, cash, and stocks.

Trusts can also have conditions on them. For example, an individual may create a trust for his children, but stipulate that they cannot receive money from the trust until they reach a certain age or complete a certain life event (such as getting married or earning a college degree).

Sometimes, economic difficulties can unfortunately affect a trust. One negative effect economic difficulties can have on a trust is to cause it to become a small trust. A trust is referred to as “small trust” when the property held in the trust decreases in value. For example, a stock that is the subject of a trust may decrease in value if the stock market dips.

What are the Effects of a Small Trust?

When a trust becomes a small trust because of a decrease in the property’s value or where the trust pays out more money than it is taking in, serious effects can result. These include the following:

  • Less money is available to pay debts incurred by the trust;
  • Smaller payouts are made to the trust’s beneficiaries;
  • Less money is available to pay fees to a bank (when using a corporate trustee); and
  • Less money is available to pay the trustee as their compensation for maintaining the trust.

All of these things are undesirable and do not fulfill the trust’s intended purposes. Because of this, the settlor and trustee should monitor their trust to determine if the property still holds the same value, especially when there is indication that the value could decrease.

How Can Someone Terminate or Modify a Trust?

If the property in a trust has dramatically decreased in value or the funds have been exhausted, you may wish to terminate the trust. Generally, a settlor is the party who terminates the trust. However, most states have small trust statutes, which are laws that permits the trustee or beneficiaries to  terminate or modify a small trust in certain situations.

Terminating a trust is essentially ending the trust completely. To carry out termination, the trustee will distribute the remaining property in the trust to the beneficiaries. The trust agreement will usually contain a section about how to distribute such property if the parties choose to terminate the trust. On the other hand, modifying a trust allows for the parties to alter the terms of the trust. Modification is ideal when changes to the trust will allow it to keep operating and provide the intended benefits to the trust’s beneficiaries. An example of modification could be allowing the settlor to put more assets into the trust.

Small trust statutes that allow for termination or modification can vary depending on your jurisdiction. However, most statutes will give you the option to either modify or terminate your small trust instead of only presenting you with one option. The fact that property in the trust has decreased in value will generally allow for termination or modification of the trust.

Some variances between the state statutes include:

  • The ability to terminate or modify a trust without receiving court approval;
  • The ability to terminate or modify the trust only after receiving court approval or beneficiary approval; or
  • The ability to terminate or modify a trust only after it decreases to a certain amount, which will be outlined in the statute.

Whether you should modify or terminate your small trust depends on the circumstances. For example, if a trustee can reallocate funds paid to beneficiaries where all would still be making a profit or receiving the intended benefit, modification would be a more ideal option.

Do I Need to Contact a Lawyer for Issues with a Small Trust?

Trusts are complex instruments that can be difficult to understand and manage, especially when they convert to a small trust. If you are a settlor, trustee or beneficiary that has issues with a small trust, you should contact a local estate lawyer. A lawyer can determine whether the trust is serving the intended purpose and if it should be terminated or modified.

A lawyer can also help you create, modify or terminate a trust. Having a lawyer draft these documents is essential to ensure that the trust and any actions following comply with your state’s applicable laws.