As a legal arrangement, a trust holds assets and property on behalf of others (beneficiaries). A trust usually has an expiration date, called a vesting date, when it is wound up. Typically, trusts must be dissolved within the vesting date so that all assets are distributed to the beneficiaries. However, you may also wish to dissolve a trust before the vesting date. Dissolving a trust can be done in a number of ways. It depends on the reasons for dissolving your trust, and the options provided in your trust deed, which method is most appropriate for you. This article discusses some of the reasons a trust may need to be dissolved, and how you can accomplish that.
What is the Purpose of Dissolving a Trust?
Trust must be formally wound up and dissolved after 80 years from when it was established, but the time period required may vary from state to state.
In addition to dissolving a trust on the vesting date, there may be other circumstances in which you may dissolve it before the vesting date. These reasons include:
- You no longer need a trust (for example, if you separate from your spouse and have established a family trust);
- It is no longer required to use the trust (for instance, you set up a trust to run a business, and then you sell it);
- You have been told that the financial and tax benefits of using a trust are limited, and are outweighed by the running costs of maintaining it; how to open a trust
- When a court finds that trust is a sham, the trust must be dissolved.
Dissolving a Trust
When it comes to dissolving your trust, you have four options. These include:
- Distributing all trust assets;
- Having the trustee or settlor revoke the trust;
- Obtaining the beneficiaries’ consent to dissolve the trust;
- A court order is required.
Divvying Up The Entire Trust Estate
Dissolving a trust involves distributing the trust property and winding up the trust. You can do this on the vesting date of the trust or on a later date if you wish, such as if the trust’s purposes have already been fulfilled.
The trustee will need to do the following when dissolving a trust:
- Identify all trust assets;
- Identify how each asset should be handled (for example, an asset may be transferred to a beneficiary or sold and the proceeds distributed);
- The trust must be discharged of all its liabilities, including tax liabilities;
- Accounts for trusts should be prepared; and
- Make sure the accounts are independently verified.
In order to dissolve a trust, the trustee must formally appoint all trust property to the beneficiaries as per the trust deed. He should also record the distributions and the dissolution.
Revocation of the trust is another method for dissolving a trust.
A trust deed gives a settlor or trustee the authority to revoke a trust. The trust deed explains the steps the settlor or trustee must follow to revoke the trust.
Revocation of a trust should be formally recorded, and the beneficiaries should have access to the records.
Accepting the Dissolution of the Trust
It is also possible to dissolve a trust by agreement of the beneficiaries. There are some conditions to dissolving a trust by agreement, including:
- Over the age of 18;
- The trust will be terminated; and
- A trust can be dissolved if both parties agree.
By the consent of beneficiaries, a trust can be dissolved:
- It is agreed that the trust should be dissolved by the beneficiaries together;
- The trustee is discharged by the beneficiaries;
- Beneficiaries receive trust property;
- Upon termination of the trust, it is recorded.