Trusts once were used almost exclusively by wealthy families to pass the family wealth down through the generations, often without paying much in the way of taxes on the transfer of wealth. Most such tax loopholes have long since been closed. Even so, trusts are more popular than ever. In fact, it is now common to find at least one trust in the average estate plan. If you are considering the addition of a trust to your plan, or you are the beneficiary of a trust established by someone else, you may find yourself wondering how a trust is terminated. The trust attorneys at Parman & Easterday will explain how a trust can be terminated and who has the authority to do so.
One reason trusts are so popular is that trusts are extremely flexible, meaning a trust can achieve a wide range of estate planning goals. Although trusts can be highly specialized to achieve specific goals, all trusts are fundamentally the same. A trust is a legal relationship in which property is held by one party for the benefit of another party. The person who creates a trust is referred to as the “Settlor”, “Trustor” or “Grantor.” The Trustor transfers property to a Trustee, appointed by the Trustor. The Trustee holds that property for the trust’s beneficiaries, invests the trust assets and administers the trust according to the terms created by the Trustor. Trusts fall into one of two categories – testamentary or living trusts. A testamentary trust is activated at the time of death by a provision in the Trustor’s Will, whereas a living trust becomes effective during the Trustor’s lifetime once all formalities have been met and the trust is funded. Living trusts are further divided into revocable and irrevocable living trusts. A revocable trust is just that–it can be revoked by the Trustor at any time. Because a testamentary trust is activated by a provision in the Trustor’s Will, and a Will can be revoked up to the time of death, a testamentary trust is also revocable at any time while the Trustor is living.
Terminating a Trust
Several factors will determine how and by whom a trust can be terminated. The type of trust will determine who has the authority to terminate it. If the trust is a revocable living trust or a testamentary trust, the Trustor may terminate the trust at any time and for any reason. If, however, the trust is an irrevocable living trust, the Trustor does not have the authority to terminate the trust once it is established.
The terms of a trust may also dictate when a trust terminates. A Trustor may include a specific date on which the trust is to terminate or may include a triggering event, after which the trust terminates. For instance, the Trustor might cause the trust to automatically terminate after the youngest beneficiary reaches the age of majority or following the death of a beneficiary. Certain types of charitable trusts, known as charitable lead and charitable remainder trusts, have the time frame built into them, after which time the trust terminates and the remaining assets are distributed to the remainder beneficiary. A Trustor may also give the Trustee discretion to terminate the trust when the trust purpose has been fulfilled or when the trust assets have diminished to the point that the trust is no longer able to fulfill its purpose. Also, if the trust assets are completely depleted, the trust will terminate.
If the Trustee or beneficiaries of a trust wish the trust to be terminated, yet lack the authority to do so, they can petition a court for judicial termination. If the court is convinced that terminating the trust is what the beneficiaries want, and doing so will not frustrate or hinder the trust purpose, the court may order termination.
Contact Oklahoma City Trust Attorneys
For additional information, please join us for an upcoming FREE seminar. If you have questions or concerns regarding the termination of a trust, contact the experienced Oklahoma City trust attorneys at Parman & Easterday by calling 405-843-6100 or 913-385-9400 to schedule your appointment today.
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