The Early Termination and Modification of TrustsTax Professionals' Resource
June 18, 2012 — 1,144 views
Accountants, attorneys and estate planners fairly often handle issues relating to trusts. These professionals could deal with living trusts, and should understand how to handle early termination and modification.
Modification of trusts
The option to modify trusts is not available in all states, but it is helpful to understand. Being ready to handle this process could help you give beneficiaries another option through which they could handle their trusts.
Living trusts might be revocable or irrevocable, and can be altered or changed unless there are explicit instructions against doing so. For example, testamentary trusts are irrevocable, and cannot be changed.
Review the trust you are dealing with before considering potential changes to the agreement. While revocable trusts can be altered or cancelled by a settlor at any time, those designed to be irrevocable cannot be changed without the consent of the beneficiary and settlor.
Be sure to check the state's estate and trust regulations before responding to a client's requests for changes to a trust. The trust is subject to the rules of the state where it was created, and following these closely will help you determine if early termination is viable.
Amending the trust should be considered the first option for settlors, as this can be completed in writing. The settlor's signature must be witnessed or notarized, or the trustee must consent to the change in the trust.
Termination of trusts
Trusts devised in some states might not be amenable, but can be terminated using a two-step process. In this scenario, the original trust can be revoked and its assets transferred to the settlor, and a new revocable trust with the assets might be created. The new trust will include a desired amendment and provision that allows it to be changed in the future.
Settlors often retain the right to revoke a trust at any time during their lifetime. Anyone designated with such responsibility can revoke trusts without the consent of the beneficiaries.
In other instances, a trust could terminate on a specific date or after a certain event occurs, such as the death of the beneficiary. Continue to follow state laws when dealing with trusts, as local regulations might allow the beneficiaries to terminate these agreements early.
Early termination could depend on several circumstances, including whether the material purpose of the trust has been completed. Additionally, the state law may consider invalidating the agreement if the settlor is living and consents to the termination.