Tips to Terminate an Irrevocable Trust

Permanent trusts are revocable and their end under specific conditions is conceivable. In this article, you will discover a few tips on ending an irreversible trust under different conditions.

Law serves to uphold justice and provide citizens with the right to protect their assets and distribute them as they find it to be appropriate, besides serving several other functions. There are many legally admissible ways of transferring assets, besides the creation of a will. Establishing an irrevocable trust is the standard procedure followed by many, who wish to transfer their assets without having to bear the tax liability they invite.

In some cases, unforeseen circumstances force the creator and beneficiaries of such an irrevocable trust, to terminate it. However, the catch lies in the fact that such a trust can’t be terminated by the grantor (trust creator). Does that mean, once a trust of this type is created, there is no way to terminate it? No, it’s certainly not so. There are certain conditions under which an irrevocable trust can indeed be dismissed.

Let it be known that this write up is purely for reference purposes and only provides an overview of the circumstances under which such trusts are terminable. Since laws associated with trusts differ from state to state in the USA, only a lawyer, well versed in state laws can guide you in this matter. Let me define the nature of an irrevocable trust, before we discuss the grounds under which it may be terminated.

About Irrevocable Trusts

Here’s a brief overview of the essential facts about irrevocable trusts, that you need to know. A grantor or settler is the individual who creates a trust of this type by transferring the control over his assets to a trustee, to eventually transfer them to certain beneficiaries. Once an irrevocable trust is created, the grantor loses all control over the assets he transfers and is not liable to any taxes imposed on them. The assets also gain protection through this transfer, as the creditors of the grantor can no longer make claims on them.

Most importantly, the settler/grantor loses the right to dissolve the trust on his own. So, the tax immunity and asset protection comes at the price of losing control over the assets and the right to revoke the trust. So what does such a grantor do when he changes his mind or circumstances force him to change his mind and he has to terminate the trust? What are the legal loop holes or valid rationales that can enable such a termination? Let us find out in the following lines.

Termination of an Irrevocable Trust

Every legal problem may have more than one solution. Through my research, I found four ways in which irrevocable trusts can be revoked or terminated by court order.

On Basis of Trust Clauses
A trust is set up by the rules of a legal agreement. The agreement itself may contain clauses about trust termination, which you could use to your advantage. Most agreements will have clauses to dismiss the trust in certain circumstances. If the conditions identified in the agreement are met, you can petition your local court for a termination, on that basis.

Through Mutual Consent of Grantor, Trustee and Beneficiaries
The most straightforward way of terminating an irrevocable trust is through the consent of all the involved parties, that include the trustee, grantor and beneficiaries. If all agree with the idea of terminating the trust, you can file a petition in court to that effect.

On the Basis of Trust Objectives Being Achieved
Every trust is created by the grantor with certain objectives or goals in mind. If these goals are achieved, the trust serves no purpose and this constitutes sufficient grounds for its termination.

Through Proof of Trust Assets Losing Value
If the assets transferred under the trust have lost their inherent value or their operating cost exceeds their actual value, it can be dissolved by court order. In this case too, a court petition by the trustees and beneficiaries is essential.

So, these were some of the conditions under which it may be possible to terminate an irrevocable trust. Take a copy of the trust agreement to your lawyer and ask him if there are grounds under which the trust can be dismissed. The simplest and most straightforward way out is getting the consent of grantor, trustee and beneficiaries in dissolving the trust. Read the agreement in detail and brainstorm with an experienced lawyer to find ways in which trust termination can be made possible.