Changes in a persons final estate can happen at any time. For this reason terminating a living trust may be required. Knowing the steps to terminate specific types of living trusts can be helpful in this situation. Here are a few general guidelines to help you understand what is involved.
There can be any number of reasons why someone would wish to terminate a living trust. Situations change in people's lives which can make termination of the trust the best option. At issue is when to terminate the trust, and how to terminate the type of living trust you have, or if you can actually terminate the trust. It is best to have legal advice when you are considering terminating a living trust. Have a lawyer or paralegal draft the actual termination notice to avoid any future conflicts.
Knowing When to Terminate a Living Trust
A living trust can be terminated upon the wish of the grantor for various reasons. Knowing when to terminate a living trust should be the priority before actually doing this. The reasoning behind the termination should be one where there is no other option. Most often the living trust must be terminated to write a new living trust to replace it. Reasons for this can include any of the following:
- the assets of the trust have diminished greatly in value since creation of the trust;
- the assets of the trust have increased greatly in value since creation of the trust;
- a beneficiary has died, or is no longer part of the group of beneficiaries, or
- a beneficiary wishes to be removed or replaced by another beneficiary such as an institution or nonprofit organization.
The next step is to know which type of living trust you are dealing with. There are three types of living trust; each has different rules for termination.
Terminating a Revocable Living Trust
This type of living trust allows the grantor full authority to terminate the trust. This can be done at any time during the life of the grantor. There is no need for consent from any other parties unless the grantor has become mentally or physically unable to make decisions on their own. A situation such as this should have a durable power of attorney in place granting this decision to another person who would then act on behalf of the grantor of the estate.
In this case the grantor would write a simple statement stating that the trust has been voided or changed. Then the grantor would sign and date the statement. The statement would then be notarized and added to the new living trust to show that there was a transfer to a new trust. If a third party is acting with power of attorney they would need to include a line such as “acting as guardian with power of attorney on behalf of (insert name of grantor)".
Terminating an Irrevocable Living Trust
An irrevocable living trust requires the grantor, or the assignees, to gain consent of the beneficiaries before changes or termination can occur. Each beneficiary must sign off on any changes to the trust in writing.
In this case the grantor, or the assignees, would send a written statement telling the beneficiaries of the intent to terminate the trust. Each beneficiary would then send back a written notarized statement agreeing to the change. Then the grantor would write a statement as directed above to terminate the trust. If all beneficiaries do not agree to terminate the living trust, it remains in effect under law and cannot be legally altered or stopped.
Terminating a Testamentary Living Trust
A testamentary living trust cannot be terminated, although this type of trust is considered part of a will. Because of this fact, and since a will can legally be altered, a testamentary living trust can be altered.
To do this the grantor would add a codicil to the trust amending it accordingly. There is no need to gain consent of the beneficiaries although it is suggested that the beneficiaries are notified of the changes. The codicil would need to be signed, dated and notarized; then added to the trust papers as it would to a will.
Physical Revocation of the Trust
This is the last step to terminate a living trust. This is also the easiest step. Remove all assets from the trust. Transfer all of the assets into accounts bearing only the name of the grantor. Then the grantor must terminate the trust in writing as they would do above. Once the assets are removed, the trust is unfunded; when the official statement is written, the trust is terminated.
References: ABAnet; ALI - ABA
How to Manage Living Trusts From Beginning to End
This series provides information about managing a living trust from beginning to end. Topics range from setting up the trust to settling or terminating the trust.
- How to Set Up a Living Trust
- How to Settle a Living Trust
- How to Terminate a Living Trust