Termination or revocation of a trust may occur for several reasons. The circumstances surrounding a trust termination, and the type of trust, help to determine how a trustee may handle termination:
- Beneficiary distributions complete. Once trust distributions have been fulfilled, the trust may be fully exhausted of assets, at which point the trustee will likely close any remaining trust accounts and terminate the trust.
- Ineffective. Changing circumstances may not allow for the trust to be administered effectively as per the grantor’s wishes.
- Not economical. If there are inadequate trust assets to justify continued administration, this could create administrative complications for the trustee and may be costly to beneficiaries. Termination of the trust might be a logical avenue if there are not enough assets held to cover annual maintenance expenses and fund distributions to beneficiaries. According to the North Carolina Trust Code, in certain circumstances a trustee may terminate a trust whose assets are valued at less than $50,000; trusts that are above this threshold may be terminated after consideration by the court if the court determines that continued administration would be wasteful.
- Lack of purpose. The trust might no longer serve a purpose for beneficiaries. Perhaps a trust was established to fund a beneficiary’s college education, but they pursued a career that did not require higher education. If no material purpose is provided by the trust, beneficiaries may be able to request termination or modification.
Factors Affecting Trust Termination Methods
Revocable and irrevocable trusts follow unique termination procedures. Although their name implies they cannot be changed, irrevocable trusts may be modified in certain circumstances. Whether the trust is charitable or non-charitable will affect the method of termination. In addition, North Carolina statutes provide for trust decanting, whereby the trustee appoints trust property in further trust for the trust beneficiaries.
In the event the settlor is deceased, or if the settlor and beneficiaries do not unanimously agree to terminate a trust, court approval may be necessary to proceed with termination.
The method of final distribution of trust assets upon termination will depend on which statute applied to effectuate the termination. Depending on the authority by which the trust was terminated, the distribution of its assets may be determined by a collective decision of the beneficiaries, by the court, or by other means. According to NC statutes:
Upon termination of a trust under G.S. 36C-4-411(a), the trustee shall distribute the trust property as agreed by the beneficiaries. Upon termination of a trust under G.S. 36C-4-411(b) or (c), the trustee shall distribute the trust property in accordance with the order entered by the NC General Statutes - Chapter 36C Article 4 10 court. Upon termination of a trust under G.S. 36C-4-412(a) or G.S. 36C-4-414, the trustee shall distribute the trust property in a manner consistent with the purposes of the trust.
Learn more about trust modifications.