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How to Dissolve an Irrevocable Trust

Tue Apr 30, 2019 | Trust Challenges |

There are two main types of trusts: revocable trusts and irrevocable trusts. By their title, one could be forgiven for assuming that a “revocable” trust, as its name would imply, is changeable, and that an “irrevocable” trust, also as its name would imply, cannot be changed. As with many legal doctrines, there is a bit of wiggle room when it comes to modifying or terminating irrevocable trusts — just not as much as with revocable trusts.

In this post, we will go over the basics of irrevocable trusts and a few mechanisms for modifying or dissolving them.

The Basics of Irrevocable Trusts

An irrevocable trust is created when the a settlor (the person who makes the trust) transfers assets into it and relinquishes all ownership and control of the trust assets. The settlor also cannot modify the terms of the trust after it has been created. Unlike a revocable trust, the assets in an irrevocable trust are no longer considered part of the settlor’s estate, and thus cannot be taxed or used to satisfy the settlor’s debts. Irrevocable trusts that are established upon the settlor’s death are also known as “testamentary trusts,” as they are created and funded according to the terms of his or her will.

Modifying or Dissolving an Irrevocable Trust

As discussed above, irrevocable trusts are not completely irrevocable; they can be modified or dissolved, but the settlor may not do so unilaterally. The most common mechanisms for modifying or dissolving an irrevocable trust are modification by consent and judicial modification.

Modification by Consent

Modification by consent occurs when all of the parties to the trust — the settlor and all beneficiaries — agree to modify the terms of the trust or revoke it. This option requires the unanimous consent of all of the parties to the trust, even remote beneficiaries who have only a small chance of receiving assets from the trust. It is also unavailable when the settlor is deceased, since a deceased settlor cannot consent to modify or revoke the trust.

Judicial Modification

If the settlor is deceased or refuses to consent to the modification of the trust, the trustee or a beneficiary of the trust may petition a court to do so. Generally, courts are willing to modify the terms of an irrevocable trust or to terminate it so long as doing so is not inconsistent with the settlor’s purpose in creating the trust. Scenarios that commonly justify judicial modification include:

  • The purpose of the trust has been fulfilled
  • The purposes of the trust have become illegal, impossible, wasteful, or impractical to fulfill
  • Compliance with the terms of the trust would defeat the accomplishment of a material purpose of the trust
  • A material purpose of the trust no longer exists

When evaluating whether to modify or terminate the trust, the court considers the terms and purpose of the trust, the facts and circumstances surrounding the creation of the trust, and any other evidence that is relevant to the proposed modification or termination.

Contact a Boca Raton Trust Administration Attorney

For more information about irrevocable trusts, including how to modify or terminate them, contact a Boca Raton trust administration attorney at the Ellis Law Group by contacting us online or calling 561-910-7500.