How to Dissolve an Irrevocable Trust

By Michelle Kaminsky

How to Dissolve an Irrevocable Trust

By Michelle Kaminsky

An irrevocable trust allows you to manage how your assets are distributed after your death, assuring that your property goes to the beneficiaries you choose. As the grantor of the trust, you not only create the terms of the trust, but you may also choose the trustee—the person who manages the trust and carries out the wishes expressed in the trust documents.

The term "irrevocable trust" may sound as if you cannot change or terminate it once it's created, but that isn't always true. Generally, an irrevocable trust is, indeed, permanent, but you may be able to dissolve one under certain circumstances. The most common methods are through provisions in the trust documents that allow for it, agreement among the beneficiaries, court approval, and the complete disposition of the trust's assets.

Trust's Terms

Some irrevocable trusts contain language that allows for their dissolution if the purpose of the trust is no longer feasible or, perhaps, if maintaining the trust becomes too expensive to administer and still further its purpose. Even in these instances, however, dissolution or modification of the trust requires court intervention to formally dissolve the trust.

In such circumstances, the trustee or beneficiaries may petition the court to intervene. Alternately, the trust documents may name a trust protector, who monitors the trust and decides whether to petition the court for dissolution or modification. If the trust has a trust protector, that individual may file a request with the court to dissolve the trust.

Beneficiary Agreement

Some jurisdictions allow for the modification or dissolution of an irrevocable trust if all beneficiaries unanimously approve. Depending on the circumstances, this may not be possible if even one of the beneficiaries refuses to agree or if you cannot locate all of the beneficiaries.

Even with unanimous beneficiary approval, you will likely need a court document to dissolve the trust. Generally, a judge examines the agreement to ensure that no material terms of the trust would be violated by dissolving the trust. You also need a formal legal document to revoke or modify the trust terms.

Court Approval

As described above, you can seek court approval to dissolve an irrevocable trust in several instances. This general principle is true even if the trust documents do not specifically provide for the potential dissolution of the trust.

Some examples are when the trust's purpose has become illegal or if the beneficiary of the trust was an organization that has dissolved. In these cases, a petition to the court to dissolve the trust may be appropriate.

Complete Asset Disposition

A trust may end up with no assets because beneficiaries have claimed all of the property, emptying the trust of its funding. Another possibility is that a trustee sells off or disposes all of the trust's assets and distributes the proceeds according to the trust documents' provisions.

Either of these situations serves to effectively end the trust, though it does not do so formally. Defunding the trust is the reverse process of funding the trust—executing deeds and transferring titles of trust property—and essentially, the trustee must follow the proper procedures for dissolving the trust.

One overriding consideration regarding the dissolution of an irrevocable trust is your jurisdiction's laws. First and foremost, be sure which state law governs the trust. While who can break an irrevocable trust and the procedure for doing so may be covered in the trust documents, you also must be sure that the process comports with state law.

To dissolve a trust, you need a formal trust revocation document that includes all pertinent information such as the name of the trust, grantor, trustee, and beneficiaries. State statutes concerning the execution of the dissolution of an irrevocable trust vary greatly on these issues, so it is critical that you comply with all applicable laws.
