How to Terminate an Irrevocable Trust

What Is an Irrevocable Trust?

An irrevocable trust is a trust agreement that, according to its terms, may not be revoked, amended, or terminated.

There are many benefits of irrevocable trusts for estate and tax planning. For example, irrevocable trusts can be used to make completed gifts that transfer assets out of the trustmaker’s taxable estate for estate tax purposes.

Irrevocable trust agreements typically include provisions that prevent creditors from seizing or attaching trust assets.

An irrevocable trust has its own tax identification number. Trust income is not reported by the trustmaker unless the trustmaker elects otherwise.

Reasons to Terminate an Irrevocable Trust

Changes in circumstances may give reason to terminate an irrevocable trust.

The benefits of an irrevocable trust could dissipate because of changes in the trustmaker’s family situation, tax law changes, wealth changes, or reduced benefit of the trust’s asset protection features.

We have found that people change their minds about trust beneficiaries, trustee appointments, or the conditions of a gift in trust. At other times, the needs of trust beneficiaries change, such that the terms of the irrevocable trust are no longer in the beneficiaries’ interest.

In such cases, an irrevocable trust may be terminated by a court or by the parties to the trust.

How an Irrevocable Trust Can Be Terminated

An irrevocable trust can be terminated in Florida either through court approval based on legal grounds such as impracticality, illegality, or undue influence, or non-judicially with the unanimous agreement of the trustee and all qualified beneficiaries.

A Court May Terminate an Irrevocable Trust

Florida statutes give a judge the discretion to terminate, or amend as appropriate, an irrevocable trust for any of several reasons.

These reasons include a court’s finding that the purposes of the trust have been fulfilled or have become illegal, impossible, wasteful, or impractical; a finding that unanticipated circumstances would defeat a material purpose of the trust; or a finding that a material purpose of the trust no longer exists.

Sometimes the amount of trust assets is so small that it is impractical to continue trust administration, considering trustee expenses, tax returns, and other paperwork.

There is a Florida statute that provides two ways to end an uneconomical trust:

(1) the trustee on his own volition may terminate a trust with less than $50,000 of assets

(2) a court may terminate a trust if the court finds that the value of trust assets is insufficient to justify the cost of administration.

If someone believes a family member was unduly influenced or defrauded into creating an irrevocable trust, or that the trust was created under duress or by mistake, Florida law gives them the right to ask a court to terminate the trust.

Judicial termination of an irrevocable trust requires a party to file a legal complaint to initiate a formal court proceeding. Judicial termination proceedings, therefore, can be complicated and expensive.

Judicial termination motions are often contested by the trust parties who would be affected.

But, there are also ways to terminate an irrevocable trust without going to court.

Non-Judicial Terminations of Irrevocable Trusts

It is easy to terminate a trust without going to court when all parties involved agree to terminate it.

Florida enacted a law to give people in agreement a way to revoke an otherwise irrevocable trust without judicial intervention. 

After the death of the trustmaker, an irrevocable trust may be terminated in whole or in part with the unanimous agreement of the trustee and all “qualified beneficiaries.” The term “qualified beneficiaries” refers to current and remainder beneficiaries, whether vested or contingent.

In the typical estate planning situation, a family in agreement may terminate a trust established by a deceased trustmaker. This law applies to trusts created after January 1, 2001.