If you are considering the addition of a trust to your estate plan you will have numerous decisions to make when creating your trust. Many of those decisions will dictate what type of trust you ultimately create. The type of trust you create, in turn, will impact whether or not the trust can be modified as well as when and how the trust will terminate.
Trusts come in two forms – testamentary trusts and inter vivos (living) trusts. In addition, a trust can be revocable or irrevocable. A testamentary trust is a trust that does not take effect until your death. Because of this, the trust is irrevocable once it becomes effective; however, as the maker of the trust you can modify the trust or even terminate the trust any time prior to your death. Once a testamentary trust becomes effective, the terms of the trust usually dictate how and when the trust will terminate. The trust may terminate when the beneficiary reaches a specific age or completes his or her education. The trust will also terminate when the last remaining beneficiary dies. You may also specific a date when the trust terminates at which time the remaining assets will be distributed to the beneficiaries. Although an irrevocable trust cannot be changed or modified by the maker once the trust takes effect, a court may terminate the trust under very narrow conditions, such as the trust assets are too low to continue to fulfill the trust purpose. Typically, the trustee of the trust must petition the court to terminate an irrevocable trust when circumstances warrant doing so.
A living trust can be irrevocable or revocable. If a living trust is made irrevocable the same rules for termination apply as those for a testamentary trust that has taken effect. For a revocable living trust, the trust terms can also dictate when the trust terminates. The maker, however, may also terminate the trust at any time, unlike an irrevocable trust. Other events that could cause a trust to terminate include:
Death of the trustee is a successor trustee was not named
Change in law that makes the trust purpose illegal
Trust terms that are unconscionable
Challenge to the creation of the trust (fraud, duress etc.)
Beneficiaries of an irrevocable trust all agree and termination is not contrary to the general purpose of the trust (requires court approval)
Rule against perpetuities (time expires under state law)
If you have specific questions about trusts, be sure to consult with your estate planning attorney.
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