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How to Dissolve an Irrevocable Trust

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You would not think that you could get out of an irrevocable trust, but that is far from the truth.

Terms of the Trust

There are two very straight forward ways for an irrevocable trust to be dissolved. There is also a less straight forward way to do so using a trust protector. These three provisions must be built into the trust.

First, is there is a statement of intent expressed in the trust and if so, has that intent been met? The irrevocable trust will automatically dissolve if its intent has been fulfilled.

You might also contend that:

  • The purpose of the trust has become illegal, impossible, wasteful or impractical to fulfill;
  • Compliance with trust terms preclude accomplishing a material purpose of the trust; and
  • A material purpose of the trust no longer exists.

Second, is there a time period expressed in the trust for its existence and if so, has that time period expired. The irrevocable trust will automatically dissolve if its period of existence has ended.

Finally, a protector may be appointed to review the current factual situation surrounding the trust and its beneficiaries and in implementing the intent of the trust, modify the trust terms to include dissolution.

Be careful, though, because the trust assets may be distributed differently than you think. Read the instrument.

Revocation by Consent

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The law of the state the irrevocable trust was formed in will specify when and under what circumstances you can dissolve an irrevocable trust. Most states allow all the beneficiaries to agree in writing to dissolve the trust. This requires unanimity and there may be additional requirements such as statements explaining the legal and tax effects to the beneficiaries on termination. Each state is different. You should consult a professional on this.

Be careful, though, because the trust assets may be distributed differently than you think. Read the instrument.

Court Intervention

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The law governing the irrevocable trust may also allow dissolution of an irrevocable trust if you, your trustee or a beneficiary file a petition with a court having oversight to dissolve the irrevocable trust. This would require you to prove “good cause” to the court. This does not, however, require the consent of everyone involved. Good cause generally encompasses your showing that continuing the trust would harm the trust property or be detrimental to the beneficiaries. Examples include

  • The purpose of the trust has become illegal, impossible, wasteful or impractical to fulfill;
  • Compliance with trust terms preclude accomplishing a material purpose of the trust; and
  • A material purpose of the trust no longer exists.

Again, be careful and read the agreement as the distribution of assets on termination may be different than you think and state law could also provide a deviation to what you think as well.

By Statute

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If the trust becomes uneconomical to administer, state law will provide a means to dissolve and distribute. Each state will have its own limits.

Also, if the beneficiary and the trustee become one and the same, you can terminate the trust by merger.

Finally, if all the assets have been distributed, terminate the trust as provided by statute.

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