When Does a Trust Terminate?

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 What Circumstances Can Terminate a Trust?

A trust is a legal entity that is commonly used for asset protection and estate planning purposes. It creates a fiduciary relationship between a person who is appointed to manage and protect certain property for the named beneficiaries until they are able to take control of that property themselves, or the trust terminates either by law or because conditions identified in the trust document are realized.

What Makes a Trust?

Trusts may come into existence upon the signing of a trust document. Or, a trust may be created by a will, in which case the trust comes into existence when the maker of the will dies. At least three parties are necessary for a trust to exist. The person who creates the trust and gives the property to it is the trustor. The person who manages the property as directed by the law and trust documents is the trustee. The people who benefit from the trust are the beneficiaries.

The trustee’s job is to manage whatever property the trustor donates to the trust. Setting up a trust creates a fiduciary relationship between the trustee and the beneficiary. A trustee then has the duty to manage the trust property in good faith for the benefit of the beneficiary.

As stated above, money is the most common type of property placed in a trust. But many other types of property can be eligible for a trust also. Other assets that may be placed in a trust are stocks and bonds, real property, personal property of exceptional value such as artwork, brokerage accounts, and more. There are many different types of trusts as well, from revocable living trusts and testamentary trusts to special needs trusts, charitable trusts, and tax bypass trusts. A trust has the characteristics that the trustor gives it when they set it up in the trust document.

Trusts are governed by state law. Many states have adopted the Uniform Trust Code, which covers the complete territory of trust creation, administration, the duties of a trustee, and the remedies available to beneficiaries who suspect a breach of their fiduciary duty by the trustee.

A few states have their own trust laws. Others have adopted modified versions of the Uniform Trust Code. A trust document can specify a principal place of administration for the trust, so the law of the state of administration would apply to any trust issues that arise. This can be done provided the trustee either is a resident of that state, maintains a place of business there, or all or part of the administration takes place in that jurisdiction,

What Terminates a Trust?

If the trustor has created a revocable trust, the trustor keeps the ability to modify, change, and even terminate the trust at any time and for any reason after the trust is established. Of course, when the trustor dies, the trust becomes irrevocable.

On the other hand, if the trustor creates an irrevocable trust, the trustor then gives up the ability to modify, change, or revoke the trust once the trust becomes effective. Therefore, if a person’s trust is a revocable trust, the person can terminate the trust at any time they wish to do so. However, if the trust is an irrevocable trust, it can only end through another means. Remember that a testamentary trust, created in a will, is revocable as long as the trustor is alive and can change their will.

Generally, the trustee of the trust must petition the court to terminate an irrevocable trust when circumstances justify doing that. Some examples of how an irrevocable trust can be terminated are as follows:

  • Termination by Age of Beneficiary: Often, the trustor may put a clause in the trust document stating that the trust should terminate automatically when the beneficiary reaches a specific age. For example, the document may state that the trust property is to be transferred to the beneficiary when they reach age 21. Transfers usually happen at the age of majority or the legal drinking age, but some trust creators may prefer to raise the age to 25 or 30, i.e. at whatever age the trustor thinks the beneficiary will be mature enough to handle the property responsibly;
  • Termination by Date: Similar to age termination, the trustor inserts language stating that the trust automatically terminates on a certain date;
  • Termination by Depletion: If the trust property comprises cash or stocks, then the property can be exhausted or used up completely. When all of the trust’s assets have been distributed to the beneficiaries, then the trust is depleted, and it comes to an end. Any asset can conceivably be depleted, and when that happens, for whatever reason, the trust is terminated. It has served its purpose;
  • Subject Matter Illegality: If the trust deals with a subject matter that is in some way illegal, it can be terminated. For example, a trustor cannot place a safe full of illegal drugs in a trust. It is possible that the law and circumstances change the legal status of a trust property in the course of its existence, which might also result in termination of the trust;
  • Fiduciary Termination: Termination can also take place if a trustee violates their fiduciary duties, such as stealing property or self-dealing;
  • Death of the Trustee: If the trustee should die and is not replaced, the trust can end;
  • Death of the Last Beneficiary: When the last beneficiary of a trust dies, the trust can be terminated;
  • Agreement of the Beneficiaries with Court Approval: If all the beneficiaries agree, a court might terminate the trust, as long as this does not violate its purpose;
  • Trust Purpose Fulfilled: If the trust had some particular purpose that has been fulfilled, it should be terminated.

It is important to remember that the trust’s creator has wide latitude to define the conditions that should lead to termination of a trust, either in the original trust document, or in a later amendment to the trust if it is a revocable trust.

What Happens After a Trust Is Terminated?

If a trust is properly terminated, all that is left to be done is to distribute the trust property to the beneficiaries as per the directions in the trust document. If for some reason a trust needs to be terminated due to a legal issue, there are a few things that might happen. First, the court may order that the trust be terminated immediately, and the property distributed to the beneficiaries. Or, the court might transfer the trust property to a constructive trust, which is an equitable remedy imposed by a court when distribution is not possible.

Sometimes the court will not replace the trust with a constructive trust, but amend the original trust document to solve the legal problems it has created. And if the trust is terminated because of a trustee’s fiduciary violations, a court may choose to appoint a successor trustee and order the violating trustee to pay damages to compensate the trust for its losses.

Do I Need a Lawyer for a Trust Termination Issue?

If you are a beneficiary or other party to a trust and are concerned about the termination of the trust, you need the help of a knowledgeable trust lawyer. Terminating a trust is a relatively straightforward matter. Or it can be a more complicated issue if the trustee’s illegality or breach of the fiduciary duty are issues.

An experienced trust lawyer knows the law of your state and can offer expert advice regarding how to proceed. They can explain what your rights and duties are, protect your interests through negotiations, and represent you in any legal proceedings if that should become necessary.

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