Modification and Termination of the Trust

Question 1

What is the general way that a trust can be modified or terminated

Answer 1

The most common way for a trust to end is by its express terms. A trust will terminate automatically upon the expiration of the term specified in the instrument.

Question 2

How can a settlor modify or terminate a trust?

Answer 2

Under the UTC, a settlor can revoke or amend a trust UNLESS the terms expressly state that it is irrevocable. However, some states, even some that have adopted the UTC, follow the traditional rule, which provides that a trust is irrevocable unless the settlor expressly reserves the power to revoke or modify the trust.

• Revocation of Irrevocable Trust: Under the law of some states, the settlor may revoke an irrevocable trust upon written consent of all living persons with vested or contingent interests

Question 3

How can beneficiaries modify or terminate a trust?

Answer 3

1. With Settlor’s Consent: A trust may be terminated or modified upon the consent of the settlor and all beneficiaries, even if the modification or termination conflicts with a material purpose of the trust.
2. Without Settlor’s Consent: A trust also may be terminated or modified on the consent of only ALL beneficiaries (i.e., without the consent of the settlor), but only if no material purpose of the trust would thereby be frustrated.

Consent of All Beneficiaries: Consent is required of all beneficiaries — existing and potential beneficiaries (including unborn or unascertained beneficiaries) of all present and future interests, no matter how uncertain or contingent. Thus, even a remote, contingent interest in an unborn beneficiary can preclude termination.

Question 4

How can a trust be modified or terminated by operation of law?

Answer 4

A trust will terminate by operation of law if:

1. The property has been exhausted OR
2. The legal and equitable titles have merged.

Question 5

How can a trust be terminated or modified by the Court?

Answer 5

1. When Lack of Consent from All Beneficiaries — A court may terminate or modify the trust if: (1) The trust could have been modified if all beneficiaries had consented (2) The interests of any nonconsenting beneficiaries will be adequately protected
2. Unanticipated Circumstances — The court may terminate or modify a trust when the purpose of the trust is threatened by unanticipated circumstances
3. Uneconomic Trust or Tax Purpose: The court can modify or terminate a trust if the value of the trust is insufficient to justify the cost of administration or to achieve the settlor’s tax objectives.

Question 6

How can a trust be modified or terminated by the Trustee?

Answer 6

1. Uneconomic Trust: In some states, a trustee can terminate a trust if the trust property is less than $50,000 and the amount is insufficient to justify the cost of administration, as long as the trustee provides the qualified beneficiaries with notice.
2. Combination and Division of Trusts: Absent contrary terms in the trust, the trustee can combine several trusts into one trust or divide one trust into several trusts, provided doing so does not frustrate any purposes of the trusts or impair the rights of any beneficiary.