While most issues with a trust can be solved with an amendment, sometimes the only way forward is to dissolve the trust entirely. The most common reason to dissolve a trust is divorce, though there can be other reasons, such as creating a trust for a purpose that no longer exists. (Actually, divorce falls in that category too.) In any case, here is how to go about dissolving a trust.
A trust can always be dissolved according to its terms. So, if the trust says when and how it can be dissolved, follow the instructions on how to do so. However, be aware that “dissolve” is not the correct legal term; the legal term is “revoke.” So you need to look for the words “revoke” or “power of revocation” in the trust. In some cases, they might say “terminate,” but it’s rare to see any other terms besides “revocation” or “termination.”
Things get tricky if the trust does not say how it can be dissolved. You’ll need to determine if the trust is revocable (i.e., it can be revoked) or irrevocable (it cannot be revoked). If the trust is revocable (which most estate planning trusts are), then you simply need to follow the procedure set out in the Probate Code. Specifically, you need to revoke the trust in writing, sign it (if it’s a married couple’s trust, then your spouse needs to sign this revocation, too), and deliver the signed writing to the trustee. If you’re the trustee, then delivery is accomplished as soon as you sign. Easy peasy.
If the trust is irrevocable, then you have a problem because the whole point of irrevocable trusts is that they can’t be revoked. In this situation, the gold standard is to involve the courts since the Probate Court has the authority to dissolve an irrevocable trust. However, suppose you don’t have the time to wait for a court hearing or the money to pay the court and attorney fees. In that case, it’s also possible to dissolve an irrevocable trust if you and all the beneficiaries agree in writing. And I mean all – if even one person refuses to sign, this method won’t work, and you’ll have to go to court.
So what’s the takeaway here? If you’re creating a trust, make sure the trust specifically states how it can be dissolved. If you’re dissolving a trust, make sure to follow the procedure outlined in the trust to dissolve it. There have been some big cases in estate planning work where people didn’t follow the procedure to modify or dissolve a trust, leading to a lot of confusion and hassle. Have a procedure in the trust, follow that procedure, and you should be in like flint.
If you have any questions, you are welcome to email me at kaway@kawaylaw.com.
