Grounds for Breaking a Living Trust

by Beverly Bird

Trusts have a reputation as being only for rich folks and providing for beneficiaries from the cradle to old age. However, anyone planning his estate can create a trust to hold as much or as little property as he likes -- and it can last as long as he decides it should. Although some trusts are ostensibly forever, others are not. Breaking one depends on who is undoing it, the type of trust it is, as well as state law.

Trust Contests versus Breaking a Trust

A trust can only be "broken" if someone -- usually the creator-- decides to undo it. If you create a trust, your beneficiaries and heirs can't break it, although they can challenge its terms after your death. This process is much like a will contest and it requires the same sort of grounds, such as undue influence or fraud. If a trust contest is successful, the court can overturn some or all of the trust's provisions.

Revocable Trusts

There are two kinds of living trusts: revocable and irrevocable. If you create a revocable trust, you can undo it at any point during your lifetime, provided you're of sound mind. These trusts give you control over the property you transfer into it. As the creator, you typically also act as the trustee, or person who manages the assets in the trust, although you should name a successor trustee to take over in the event of your death or if you ever become incapacitated. Until either of these events occur, you have an absolute right to pull the plug, transferring the property back into your personal ownership. Revocable trusts avoid probate of your assets when you die, but they don't protect your assets from creditors or avoid estate taxes.

Irrevocable Trusts

Irrevocable trusts can shield your estate from taxation and hold them out of the reach of creditors or lawsuit judgments, but in exchange for these perks, you must give up control of the assets you place into it. In the case of an irrevocable trust, you would not act as trustee but would designate someone else to take over management of the trust and its property. Technically, you can't change your mind about an irrevocable trust and undo it later if it no longer meets your needs. However, some states include provisions in their laws for doing so under certain circumstances.

Means of Revocation

Some states, such as New York, allow the trustee of an irrevocable trust to amend its terms or revoke it entirely if he has the written agreement of all the beneficiaries of the trust. If any of the beneficiaries are still minors, they can't legally give their consent, but the court will generally waive this requirement for them if changing or revoking the trust won't prejudice them in any way. New Jersey law allows you to reform your trust -- meaning, you can change it -- although you can't break or revoke it. Changing it involves filing a legal action with the court and establishing a legitimate reason for the modification, such as if the needs of one of your beneficiaries changes due to an unforeseeable illness or disability. However, the court won't grant your request on a whim. For example, you can't modify your trust simply because you've changed your mind about who you want to name as beneficiaries. Some states, such as North Carolina, allow your beneficiaries to ask the court to modify the terms of your trust after your death, particularly if you made an error in the formation that affects distributions. All these options are highly dependent on state law.

When Revocation Isn't Possible

If your state doesn't allow for revocation or modification of an irrevocable trust under any circumstances, you might still have an option. Depending on how you initially drafted your trust's terms, you may be able to ask your trustee to dissolve it. You typically can't get your property back, but he can create and move your assets into a new trust with terms that are more to your liking. Some states, such as New Jersey, don't allow this, but with the help of an attorney, you may be able to move your trust to a state with more favorable laws.