An irrevocable trust is an estate planning tool that the grantor can use for a variety of reasons, including minimizing estate taxes, providing for family members and keeping financial information confidential. Three parties are involved in irrevocable trusts: the grantor, who creates the trust; the trustee, who manages the trust; and the beneficiaries, who benefit from the trust. Unlike a revocable trust, an irrevocable trust can only be modified or terminated in certain circumstances. An irrevocable trust may automatically terminate on a specific date if the grantor specified a termination date in the trust document. If the grantor did not provide a termination date, an irrevocable trust may be terminated for other reasons.
A grantor can specifically write instructions into the trust document that state when the trust is to terminate. The trust will automatically terminate on the date stated in the trust. The trust instrument may not provide an exact date, but it may state the trust is to terminate when its purpose is fulfilled. If the trust does not include a self-termination section, the trust may be terminated for other reasons, such as when the material purpose of the trust has been fulfilled. For example, if the grantor created the trust to fund his grandson's college education, the trust's purpose is fulfilled when the grandson graduates from college. The property in the trust is distributed to the beneficiaries when the trust terminates.
An irrevocable trust may be terminated with the consent of all the beneficiaries and the grantor. All beneficiaries who have any chance of receiving property must agree to the revocation. An irrevocable trust can be terminated by consent even if the termination is contrary to a material purpose of the trust, which means the trust cannot fulfill its purpose. For example, if the grantor created a trust to fund his grandson's college education and the trust is terminated before the grandson goes to college, the trust cannot fulfill its purpose. Termination by consent cannot occur if the grantor is no longer living. In states that have adopted the Uniform Trust Code, which is a model law governing trusts that can be adopted by any state, the beneficiaries decide how to distribute property in the trust after the trust has been terminated by consent.
If the grantor is no longer living or does not consent to the termination, the beneficiaries must petition a court for revocation. A court ordered termination may go smoother if all beneficiaries agree to the termination, but consent from all beneficiaries is not required as long as all beneficiaries' interests are protected by the revocation. A judge will determine whether the reason the beneficiaries petitioned to terminate the trust justifies terminating the trust and is not contrary to the intent of the grantor. A judge will also determine whether terminating the trust protects the best interest of all the beneficiaries, particularly the beneficiaries who did not join the petition for revocation.
Beneficiaries may petition a court to terminate a trust for a few reasons. One reason is the purpose of the trust is impossible or impracticable to fulfill or the purpose is unlawful. For example, a trust may be created to financially support the grantor's disabled child. If that child dies, the trust is no longer necessary and may be terminated. Another reason is the administration of the trust is more expensive than the value of the property in the trust, which makes the trust uneconomical. A trust may require the ongoing work of a lawyer and an accountant, which can be costly. If the value of the assets in the trust do not justify the high cost of the professional work required to maintain the trust, the trust may be terminated.