In short, a trust is a legal device that allows for the transfer of property for the benefit of another individual. In legal terms, the term trust refers to a type of property arrangement in which the property owner, called the grantor, puts a portion of their property in trust for the benefit of another designated individual, known as a beneficiary.
The property which is held in the trust is managed by a third party, who is referred to as the trustee. The laws which govern trusts vary from state to state.
However, in general, trusts are an efficient way for individuals to transfer their assets in such a way that they are able to control and manage them. An example of this would be when the grantor places certain conditions on the property of the trust which must be fulfilled before the property is transferred, such as when the beneficiary reaches a specific age.
Trusts may be created for a wide variety of reasons, including:
- For the financial benefit of the trust creator or settlor;
- To financially support a surviving spouse or minor children; or
- For a charitable purpose.
There are several different types of trusts which are legally recognized. The most common type of trust, however, is an express trust. An express trust is intentionally created to purposefully distribute the property of funds to the trustee, who then holds that property in trust for the recipient.
Express trusts may be further categorized into a lifetime, or inter vivos, trust, which is set up during the lifetime of the grantor, and a testamentary trust, which is a trust which is created upon the death of the grantor.
For a trust to be valid, certain requirements must generally be met. Examples of these requirements include:
- The trust must have a settlor, or creator, and the settlor must deliver legal title of the property to a trustee;
- There must be an intent to create a trust;
- The trust must be created for a lawful purpose; and
- The document which embodies the trust must be validly executed.
How is a Trust Terminated, and Who May Terminate a Trust?
A trust may be terminated. A trust is commonly terminated when the property in the trust is exhausted.
For example, if the property in the trust was stocks or cash, all of that property, including interest, is paid out to the beneficiary or beneficiaries. A trust may also be terminated if the property was a home that was destroyed or the trust itself naturally ended.
Further, if a grantor specifies an end date or a condition which, when it is met, the trust will terminate, the trust will terminate on that date or the date on which the condition is met. For example, if a trust is created to fund college expenses, it will terminate when the beneficiary graduates from college.
Examples of circumstances in which a trust may be terminated include, but are not limited to:
- The creator, or settlor, was not of sound mind at the time the trust was created, and thereby renders the trust invalid;
- The trust was created by the settlor under:
- Undue influence, which is a level of influence brought to bear on an individual by another individual who would cause the individual to act other than by their own free will or choice;
- Mistake; or
- The trust was made for a purpose that is illegal, for example, for tax fraud;
- The trustee is deemed to violate their duties; or
- There is a dispute between the beneficiaries when there is more than one beneficiary.
In general, the settlor of a trust is the only individual who may terminate the trust. There are, however, other parties who can often terminate a trust, including:
Multiple beneficiaries who are contesting or disputing the trust. It is important to note that this usually requires an agreement on the part of all of the beneficiaries;
Parties that may be negatively affected by the trust; or
By operation of law, for example, the trust involves illegal conduct or is too small to operate properly as a trust.
There must be some intention which is expressed regarding the termination of the trust. Verbal instructions for terminating a trust may be permitted, but it is best if any instructions regarding the trust are put in writing.
Unless a trust specifies so, a trustee is typically never allowed to terminate the trust. In certain situations, a court may intervene and terminate the trust.
However, this is usually reserved for cases in which there was an impracticability, illegality, or the trust expired.
What Else Should I Know About a Terminating Trust?
A trust may either be revocable or irrevocable. If the trust is revocable, the individual who establishes the trust reserves the right to cancel that trust and recover the property.
If the trust is irrevocable, it means that the terms of the trust are not permitted to be modified or terminated. It may be possible, however, to modify an irrevocable trust in certain situations.
For example, an irrevocable trust can be modified or revoked with the consent of the settlor and all of the beneficiaries involved in the trust. Terminating a trust results in the total extinguishing of the trust’s assets.
However, the modification of the trust only changes a portion of the trust to reflect the new intent of the settlor or to reflect any conditions which have changed. Examples of common disputes that arise related to revocable trusts may include:
- The timing of the trust revocation. For example, if a beneficiary depends on the trust property for various reasons and the timing of the revocation causes legal conflicts;
- A conflict regarding the trust property itself. For example, confusion regarding the property if it is difficult to identify or locate based on the instructions in the will; or
- The validity of the revocation. For example, the trust does not meet the requirements of the state for being a revocable trust.
As previously noted, a trust may be terminated for various reasons, but they are generally terminated once the trust has been exhausted or the specific conditions have been met. Other circumstances which may cause a trust to be terminated include:
- If the beneficiary and the trustee become the same individual and there are no other beneficiaries involved with the trust;
- The trust specifies that a trustee is permitted to terminate the trust and the trustee chooses to do so; or
- The state’s laws created a deadline for the trust to have been executed and expired.
Should I Hire an Attorney if I Want to Terminate My Trust?
As discussed above, there are numerous reasons why a trust may be terminated. Usually, the first step to terminating a trust is to contact the attorney responsible for helping to create the trust.
Because of this, in addition to the variations in state laws, it would be beneficial for you to consult with a skilled and knowledgeable trust lawyer. Your attorney can assist you with determining the best course of legal action based on your unique situation.
Your attorney will also be able to advise you regarding your state laws and how they may affect your claim. If you have to appear in court, your attorney will represent you.