How to Dissolve a Trust in Court

by Heather Frances J.D. Google
A trust's founding documents may provide special dissolution rules.

A trust's founding documents may provide special dissolution rules.

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Setting up a trust allows you to safeguard your funds for certain purposes. For example, you can create a trust that both protects your assets after your death and distributes income to your beneficiaries on a regular basis. However, trusts can be dissolved under some circumstances, with or without going to court, depending on the type of trust, trust terms and your state’s laws. Laws and procedures vary from state to state regarding what you’ll need to do to dissolve a trust in court.

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Trusts

A trust is a legal arrangement that creates a separate entity, the trust, to own assets placed in it. You, the grantor or settlor, can give the manager of your trust, the trustee, certain authority within your state’s laws to manage the trust’s assets. For example, trustees typically have power to invest the trust’s funds, or assets, in real estate, stocks or other investments for the benefit of the trust’s named beneficiaries. Since trusts operate under the terms of the trust, you may wish to check your trust document, state laws and local court for specific dissolution procedures that apply to your trust.

Revocable Trusts

Revocable trusts, sometimes called living trusts, allow you to keep control over your assets while they are in the trust because you control the trust. Oftentimes, grantors of a revocable trust also serve as trustee and beneficiary of the trust. Since this type of trust arrangement gives you continued control over the trust’s property, it does not carry some of the tax benefits and asset protection found in irrevocable trusts. However, revocable trusts can be dissolved at any time without a court order, though your state’s laws may require you to send certain notifications after dissolving the trust.

Dissolution After Grantor's Death

Since irrevocable trusts are generally designed to be more restrictive than revocable trusts, dissolving an irrevocable trust is more complex. Your state may require certain evidence, such as proof that the material purpose of the trust cannot be achieved, in addition to consent to the dissolution from all beneficiaries, before the court will order dissolution of an irrevocable trust. This allows your beneficiaries to terminate the trust after you have died and can no longer provide consent to the trust’s dissolution. For example, New York courts can dissolve a trust if all beneficiaries agree and the reasons for the dissolution outweigh the material purpose of the trust.

Dissolution Before Grantor's Death

Your state may allow the court to dissolve an irrevocable trust if you and the trust’s beneficiaries agree, even if the dissolution is inconsistent with the trust’s material purpose. For example, Oregon permits courts to terminate irrevocable trusts under this condition, but the Oregon attorney general must consent to the dissolution if the trust is considered a charitable trust. Once the trust is terminated, the trustee distributes the trust’s assets to the beneficiaries.