If you are like many people, you may already include a trust as part of your comprehensive estate plan. If you have yet to create a trust, there is a good chance you will establish one at some point down the road. Knowing how a trust is created is certainly important; however, it is equally important to know how a trust terminates. With that in mind, a Phoenix trust administration lawyer at Morris Hall PLLC explains the circumstances under which a trust may terminate.
Creating a Trust
Before discussing how to terminate a trust, it helps to learn the elements that go into creating a trust. Once used almost exclusively by wealthy families as a vehicle by which the family fortune was passed down through the generations without paying taxes on the transfer of wealth, trusts are now commonly found in the average person’s estate plan. Trusts have also evolved to the point where there are now several specialized trusts that can be used to achieve a wide range of estate planning goals. All trusts, however, are created using the same five elements, including:
- Settlor – this is the person who creates the trusts and may also be referred to as the “Maker” or “Grantor” of the trust.
- Trustee – the Trustee is appointed by the Settlor and is in charge of managing and investing trust assets as well as administering the trust using the trust terms.
- Beneficiary – every trust must have at least one beneficiary to receive the benefits of the trust; although, a trust may have numerous beneficiaries.
- Terms – the Settlor creates the terms that govern the administration of the trust. Terms may be almost anything as long as they are not illegal, impossible, or unconscionable.
- Assets – a trust requires funding. Funding may include any type of assets, including cash, securities, real or personal property, or life insurance proceeds.
Terminating a Trust
How a trust terminates will depend, to some extent, on the type of trust in question. If the trust is a revocable living trust or a testamentary trust, the Settlor has the authority to terminate the trust at any time and for any reason. If, however, the trust is an irrevocable living trust the Settlor does not have the authority to terminate the trust after it is established.
The terms of a trust may also dictate when the trust terminates by including a specific date on which the trust is to terminate or by including a triggering event that causes the trust to terminate. By way of illustration, the Settlor might include a term requiring the trust to terminate upon the marriage of the trust’s only beneficiary or upon the youngest beneficiary reaching a specific age. Another way a trust might terminate is if the Settlor gave the Trustee the discretion to terminate the trust when the trust purpose has been fulfilled or when the trust assets diminish to a point at which the trust is no longer able to fulfill the trust purpose.
Judicial Termination of a Trust
If the trust terms are silent or vague regarding a Trustee’s authority to terminate the trust it may be necessary to petition a court to have the trust terminated. In the State of Arizona, Arizona Revised Statutes §14-10414 governs the termination of a non-economic trust stating as follows:
A. After notice to the qualified beneficiaries, the trustee of a trust that consists of trust property having a total value of less than one hundred thousand dollars or that is uneconomic to administer may terminate the trust if the trustee concludes that the value of the trust property is insufficient to justify the cost of administration. This subsection does not apply to an interested trustee as defined in section 14-11014.
B. The court may modify or terminate a trust or remove the trustee and appoint a different trustee if it determines that the value of the trust property is insufficient to justify the cost of administration.
C. On termination of a trust under this section, the trustee shall distribute the trust property in a manner consistent with the purposes of the trust.
D. This section does not apply to an easement for conservation or preservation.
Contact a Phoenix Trust Administration Lawyer
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about terminating a trust, contact an experienced Phoenix trust administration lawyer at Morris Hall PLLC by calling 888-222-1328 to schedule your appointment today.