What Happens When a Trust No Longer Has Assets?

By Andrine Redsteer

Trusts must adhere to specific requirements to be valid. All trusts, including living trusts and irrevocable trusts, must have trust assets, i.e. property, a trustee and beneficiaries. In general, when a trust runs out of assets, the purpose of the trust is considered fulfilled and the trust may be terminated. Depending on the circumstances, the trust may need to be officially dissolved by obtaining court approval.

Trust Basics

A trust is an arrangement -- created by a trust document -- whereby a trust creator, also referred to as a "settlor," transfers assets to a trustee. The trustee has a responsibility to manage, protect and distribute trust assets according to the terms of the trust document. A trust must have a trustee, assets and beneficiaries to be valid. The absence of assets, in particular, will render a trust arrangement impossible.

Trust Assets

Trust assets may include money, royalties, stocks, and other types of property interests. Such trust assets must be ascertainable when the trust is created. In other words, expectancy or anticipation of income or property is not enough. Trust assets include any income earned on the principal. When a trust's income and principal are depleted, the trust is generally considered to have fulfilled its purpose.

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Final Distributions

Final distributions of a trust may be made when the trust no longer has assets, has become too expensive to administer, or the trust's termination date -- as stated in the trust document -- has arrived. Once final distributions are made to beneficiaries, a trust with a fixed duration may automatically terminate or be terminated with a court's permission.

Terminating a Trust

Although state law varies -- and the rules of trust termination vary depending on the type of trust -- a trust with assets that are less than the amount it takes to administer the trust may require the beneficiaries' consent and court approval before it may be terminated. Some states, such as Florida, allow a trustee to terminate a trust if its total value is less than $50,000 and he believes the value of trust assets are insufficient to continue administering the trust.

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Living Trusts in Michigan

A trust is a vehicle for holding assets. In the United States, trusts are governed by state law. Although the Michigan Trust Code, found in the Estates and Protected Individuals Code, includes certain distinctive features, the basic principles of Michigan trust law are similar to elsewhere in the United States.

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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.

Trustee Duties for a Revocable Trust After Death

When a grantor creates a revocable trust, he must appoint a trustee to manage or administer the trust. Trustees have fiduciary duties, meaning they must always administer the trust in the best interest of the beneficiaries and pursuant to the terms of the trust document. Moreover, if the trust doesn’t terminate upon the death of the grantor, the trustee continues to be responsible for these duties pursuant to the terms of the trust document.

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