A trust is an estate planning tool that establishes relationships under the direction of the trustor, or settlor. The trust directs an individual or individuals, called trustees, to hold the property of the trustor for the benefit of other individuals, called beneficiaries.
A trust may be created for many reasons, for example, the financial benefit of the creator, as financial support for a surviving spouse, or for a charitable purpose. A trust may be revocable or irrevocable.
Revocable trusts allow the individual who established the trust to cancel the trust and recover their property. Irrevocable trusts cannot be modified or terminated.
What are the Requirements for a Valid Trust?
There are several requirements for creating a trust, including:
- Intent: The trustor must have intended to create the trust when it was created;
- Trustee: There must be an individual who is in charge of managing the trust for the benefit of the beneficiary and transferring the assets to the beneficiary. The court may appoint someone if no specific individual is designated;
- Beneficiary: The trust must state who will receive the trust’s assets;
- Purpose: There must be a specific purpose for the trust that does not involve furthering illegal activity; and
- Assets: The trust must have assets, such as money or property.
Who is in Charge of a Trust Account?
The individual who is in charge of a trust account is referred to as the trustee, or trust administrator. A trustee is responsible for managing, depositing, and withdrawing funds into the trust account according to the instructions provided by the trustor when the trust was created.
A trustee is typically chosen by the trustor, for example, when a testator creates a trust as part of their estate plan. The trustor may also name an alternate trustee in case the first choice is not able to manage the trust.
If it becomes necessary, the court can also name a trustee. It is important for an individual to choose a capable trustee for the successful administration of a trust.
The trustee is typically an individual who does not have a financial interest in the funds in the trust or does not stand to benefit in any way from the arrangement. As the name indicates, the individual should be trustworthy.
Because of this, many trustors will choose a friend or family member who is good with money, knowledgeable about investing, or who will enlist the help of a financial advisor to be their trustee.
Professional trustees, such as accountants or lawyers, are also another option for individuals who can make the trust administration less complicated than involving friends or family.
What Can be Placed in a Trust?
One of the important elements of a trust is that they contain assets. The title to these assets should be transferred to the trust if the asset has a title, for example, real estate or stocks and bonds.
There is no title to personal property, such as jewelry, clothing, and furniture. It is also possible to transfer these types of items into the trust by transferring the property rights to the trustee to serve as assets for the beneficiaries of the trust.
There are certain types of assets that cannot be transferred to the trust because their distribution is determined by the beneficiary who is named in the policy, including:
- Life insurance policies;
- Retirement accounts;
- Pension plans; and
- Health savings accounts.
In order to place assets derived from these types of items in trust, the named beneficiary must be the trustee.
Who is Considered a Valid Beneficiary?
Any individual may be a trust beneficiary so long as they are properly named in the trust document. Beneficiaries are often:
- Spouses;
- Children;
- Grandchildren; or
- Friends.
Depending on the trust, beneficiaries may also include:
- Pets;
- Co-workers;
- Strangers; or
- Employees.
A trust beneficiary must be definite and certain. When a trust is created, the beneficiary must be ascertainable.
The beneficiary’s description is required to be detailed enough so that a court can determine their identity.
What is Needed for Terminating a Trust?
Trusts, as noted above, can be created for many reasons. In certain situations, the need to terminate a trust may arise.
Parties that may terminate a trust include:
- The trust creator;
- Beneficiaries who are contesting or disputing the trust. This usually requires an agreement to do so between all beneficiaries;
- Parties that may be negatively affected by trust; and
- By operation of law, for example, if the trust involves illegal conduct or is too small to operate properly as a trust.
The main requirement is that some intention be expressed regarding the termination of the trust. In certain cases, verbal instructions for terminating a trust may be permitted, but it is usually best if the termination instructions are provided in writing.
That way, the parties involved have a record that can be referenced in court, if necessary. In addition, trust termination may depend on whether the trust is revocable or not, in other words, if the trust creator has reserved a right to cancel the trust.
When Can a Trust be Terminated?
If the trust is revocable, the main requirement is that the termination of the trust occurs according to the instructions that are set forth in the trust guidelines. Because all trusts are unique, this will depend on the needs of the creator of the trust.
If the creator of the trust did not provide guidelines, typically, the trust may be terminated at any time and for any reason, so long as it is not illegal to do so. In addition, the trust document should indicate whether or not the trust is revocable.
As mentioned above, termination being sought by the beneficiaries will depend on the state law where the trust is located. There are some states that require an unanimous agreement amongst all beneficiaries that the trust should be terminated.
In other states, only a majority vote between the beneficiaries is required. In some cases, the court may intervene and terminate the trust.
This may occur in cases where the trust involved an illegal subject matter, for example, the transfer of drugs or other illegal substances. In addition, some states have small trust laws that require a trust to be terminated if the trust funds are too small, or are below a certain amount.
What Else Should I Know about a Terminating Trust?
In certain situations, it may be possible to modify an irrevocable trust. For example, an irrevocable trust may be modified or revoked with the consent of the settlor and all beneficiaries.
The termination of a trust will result in the total extinguishing of trust assets. However, the modification of the trust only alters a portion of the trust to reflect the new intent of the settlor or to reflect any changes.
Common disputes regarding revocable trusts include:
- The timing of the revocation, for example, a beneficiary depending on the trust property for various reasons but the timing of the revocation causing legal conflicts;
- A conflict involving the trust property itself, such as confusion regarding the property if it is hard to identify or locate based on the will’s instructions; or
- The validity of the revocation, for example, if the trust does not meet the state requirements for being a revocable trust.
Trusts are generally terminated once they have been exhausted or specific conditions have been met. Other circumstances that result in termination may include:
- The trustee and beneficiary become the same individual and there are no other beneficiaries involved;
- The trust specifies that the trustee is allowed to terminate the trust, and they choose to do so; or
- State laws create a deadline in which the trust must have been executed and has expired.
Do I Need to Hire a Lawyer for Help Terminating a Trust?
The termination of a trust may involve numerous different laws and financial planning rules. It may be in your best interests to consult with a trust lawyer if you need assistance with trust termination or other matters.
Your lawyer can help you understand the procedures and guidelines for terminating a trust. In addition, if the need for a lawsuit arises, your lawyer can represent you during court appearances and meetings.
