Can You Terminate a Trust Early?
A really important question that often comes up is whether or not you can terminate a trust early. Let’s dive into it.
Revocable vs. Irrevocable Trusts
The short answer is: maybe—but it depends on the type of trust. When discussing early termination, it’s important to distinguish between revocable and irrevocable trusts. A revocable trust can be revoked, amended, or terminated at any time by the person who created it. There’s really no limit to what you can do with a revocable trust, so this question doesn’t apply to that kind of trust.
Instead, this question is really relevant to irrevocable trusts, which are much more rigid by design. There are generally three situations in which an irrevocable trust might be terminated early.
1. Termination Allowed by the Trust Document
The first situation is when the trust document itself includes provisions that allow early termination. Even though the trust is labeled “irrevocable,” it might contain language that gives the trustee discretion to terminate it early under certain conditions.
A common clause is one that allows the trustee to end the trust if it is no longer economically reasonable or feasible to continue administering it. For example, if the expenses of managing the trust are greater than the income being generated—causing the trust to dip into its principal—it may no longer make sense to keep it going. If the trust document allows it, the trustee can make that decision.
2. Judicial Modification or Termination
The second way to terminate an irrevocable trust early is through a court order. This often comes into play when the trust document does not give the trustee the authority to terminate the trust, but it still no longer makes economic or practical sense to continue it.
In such cases, the trustee or the beneficiaries can petition the court for a judicial modification or termination of the trust. With approval from a judge, the trust can be dissolved and its remaining assets distributed to the beneficiaries. This process is governed by state law, so the exact procedures and requirements can vary.
3. Decanting the Trust
The third method involves a legal strategy known as decanting, which is also regulated by state law. In states where this is permitted, a trustee can move the assets from the original (or “first”) trust into a new trust or an existing one that better suits the current needs of the beneficiaries.
Reasons for decanting could include changes in family or financial circumstances, updates to tax laws, or simply the fact that the original trust is no longer serving its intended purpose. Once the assets are moved, the original trust is essentially emptied or “impoverished.” While this doesn’t technically terminate the trust in a formal sense, it renders it obsolete, as it no longer holds any assets or serves any practical function.
Summary
To recap, there are three main ways an irrevocable trust might be terminated early:
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Built-in Termination Clause – The trust document explicitly allows the trustee to end the trust under certain conditions.
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Judicial Approval – The trustee or beneficiaries petition the court for termination.
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Decanting – Assets are transferred to a new trust, rendering the original trust obsolete.
While irrevocable trusts are designed to be permanent, these strategies show that there are paths—depending on the trust language and state law—that allow for flexibility when circumstances change.