How to Dissolve a Trust in Court

By Heather Frances J.D.

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.

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.

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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.

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How to Dissolve an Irrevocable Trust
 

References

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How to Break an Irrevocable Trust

Two types of trusts are possible: a revocable trust and an irrevocable trust. Although the grantor can unilaterally revoke a revocable trust, even a revocable trust becomes irrevocable when the grantor dies. The assets of an irrevocable trust belong to the trust beneficiaries, not the grantor. Even an irrevocable trust can be revoked under certain circumstances, although it is almost impossible for a creditor of the grantor or a beneficiary to revoke it. Although the trust laws of the various states differ on the grounds and procedures for revocation, they are all based on similar principles.

Does a Living Trust Need to Be Registered in North Carolina?

Living trusts, also called revocable trusts, are popular estate planning tools because they avoid the costs and delays of probate courts. Wills must be probated and become part of the public record when they are filed with the court. However, most states, including North Carolina, afford privacy to a living trust's creator and beneficiaries by not requiring public registration of trusts.

Amending a Florida Trust

A trust is an instrument that allows one party, known as the settlor, to contribute assets to the trust and to name another party, known as the trustee, to administer them for the benefit of named beneficiaries. Trusts are governed by state law, and Florida's trust code can be found in Chapter 736 of the Florida Statutes. The procedure for amending a trust depends on whether the trust is revocable or irrevocable.

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