A trust is a legal document that is commonly used for asset protection and estate planning purposes. It creates a fiduciary relationship by appointing someone to manage and protect the property on behalf of the named beneficiaries until they are able to take control of that property themselves, or the trust terminates either by law or through its own language.
What Makes Up a Trust?
Unlike a will, most trusts go into effect immediately upon signing. A will only becomes executable upon the signer’s death, but the average trust (also known as a living trust) becomes an active legal document once all of the proper elements are met. There are three necessary parties to create a trust: the creator (trustor or settlor), beneficiary/ies, and a trustee.
The trustee’s job is to manage whatever property the creator places into the trust, which is most commonly money. This creates a fiduciary relationship between the trustee and the beneficiary, and the trustee then has the duty to manage the trust in good faith for the benefit of those who will eventually receive the named property.
As stated above, the most common type of property placed in a trust is money. But many other types can be eligible for trust management as well. Other assets that may be placed in trust protection are stocks and bonds, real property, personal property, brokerage accounts, and more. There are many different types of trusts as well, from the more general revocable living and testamentary trusts, to more specific special needs, charitable, and tax by-pass trusts. The type of trust depends on what the creator wishes to accomplish.
What Terminates a Trust?
The many types of trusts and the flexibility they offer the creator means that the ways to terminate one are just as numerous. Some of the most common termination methods are:
- Age termination. The trust creator puts a clause into the trust stating automatic trust termination when the beneficiary reaches a specific age. For example, the document “trust property is to be transferred to the beneficiary when they reach age 21.” Transfers usually happen on age of majority or legal drinking age, but some trust creators may prefer to raise the age to say, 25.
- Date termination. Similar to age termination, the creator inserts language stating that the trust automatically terminates on a certain date.
- Subject matter illegality. If a part of or the entirety of the trust deals with illegal matters, a trust will be terminated. While there are certainly obvious examples of this, some are far more complicated. For example, you can’t place a safe full of illegal drugs in a trust. But there are situations where laws and circumstances change the legality of trust property down the line, which might also terminate a trust.
- Fiduciary termination. Termination can also take place if a trustee violates their fiduciary duties such as stealing property or self-dealing.
- Contest termination. When beneficiaries file legal disputes or contests against the trust itself or another beneficiary.
It is important to remember that the trust’s creator has wide latitude to define what will terminate the trust either in the original trust language, or a future amendment to the trust.
What Happens After a Trust Terminates?
If a trust terminates properly, all that’s left to be done is to distribute the trust property to the beneficiaries as per the trust’s language. But if for some reason a trust needs to be terminated due to a legal issue or due to beneficiary contest, there are a few things that might happen. First, the court may order the trust dissolved immediately, and the property distributed to the beneficiaries. They may also take the trust property and transfer it into a constructive trust, which is an equitable remedy imposed by the court when distribution is not possible.
Sometimes the court will not replace the trust entirely with a constructive trust, but amend the original language or add an addendum to solve the issues at hand. And if the trust is terminated due to fiduciary violations by the trustee, a court may choose to appoint a successor trustee and order the violating trustee to pay damages sufficient to compensate the trust/beneficiary.
Do I Need a Lawyer for a Trust Termination Issue?
If you are a beneficiary or other party to a trust and are facing a termination or other legal issue, you need the help of a trust lawyer well-versed in trust and estate law. Terminating a trust can have a major impact on the current and future rights of beneficiaries, so seeking the expertise of someone familiar with your state’s laws is an important step. They can explain what your rights are, protect your interests through negotiations, and represent you in any legal proceedings (including trial) if necessary.