How to Dissolve an Irrevocable Trust

by Beverly Bird

    By definition, you're not supposed to be able to dissolve or revoke an irrevocable trust, but there are exceptions to every rule. You probably designed your trust to serve a certain purpose, and when it's met that purpose, your selected trustee can close it. There are limited ways you can terminate your irrevocable trust during your lifetime as well.

    What a trust can and cannot do is usually governed by state law. Many states allow for the dissolution of an irrevocable trust if you and your beneficiaries all agree to it in writing. Consent must be unanimous, and complications can arise in some states if any of your beneficiaries are minors. For example, New York law does not allow a minor to make such a decision, and his parents can't give his consent for him.

    Some states, such as Georgia, permit dissolution of an irrevocable trust if you, your trustee or a beneficiary file a petition with the court to terminate it. You'd need good cause, but this option wouldn't require the consent of everyone involved. Typically, the court would want to know that some harm would come to the trust's assets or to its beneficiaries if it were permitted to continue. The assets with which you funded your irrevocable trust – and which you gave up control over when you created it – usually distribute to your beneficiaries if your trust is dissolved prematurely. They may not revert back to your ownership.

    After your death, the terms of your trust are pretty much carved in granite. Even revocable trusts become irrevocable when the trust maker dies. Your trustee must either distribute all the trust's assets to beneficiaries immediately, or the trust will continue to operate so it can achieve the goals you set out in your trust documents. For example, you might have written in spendthrift language because your son is your primary beneficiary, but you know he's not good with money. You can direct your trustee to mete out distributions to him over a period of many years rather than give him a large lump sum all at once. In such a case, your trust would continue to exist, at least during his lifetime. If you set up an irrevocable life insurance trust instead, you may want all your beneficiaries to receive the death benefits immediately. In this case, the insurance proceeds would be payable to your trust, your trustee would distribute the money to your beneficiaries, and the trust would then close.

    Whether your trust closes immediately after your death or lives on for a while to serve your intentions, it must eventually close. This typically involves payment of any outstanding debts or taxes before the trustee distributes the trust's assets and income to your named beneficiaries. In some states, your trustee must submit a formal accounting of the trust's operation to all beneficiaries. This can be a complex report, particularly if the trust existed for many years. Trustees can sometimes waive this requirement if all beneficiaries agree in writing. In either case, after the report is made, the trust's assets can be distributed and the trust can be dissolved.

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    About the Author

    Beverly Bird has been writing professionally since 1983. She is the author of several novels including the bestselling "Comes the Rain" and "With Every Breath." Bird also has extensive experience as a paralegal, primarily in the areas of divorce and family law, bankruptcy and estate law. She covers many legal topics in her articles.

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