Article

How to Terminate a Trust in Texas

Sep 26, 2017

When a trust statement is drafted, it is almost impossible to take all possible life scenarios into consideration. If something has slipped through the cracks and you realize your family trust fails to address certain issues, Munsch Hardt may be able to help you modify or terminate it.

Terminating a Revocable Trust

Trusts that were created during the settlor’s life can be either “revocable” or “irrevocable.” A revocable trust can be ended by the settlor at any time.

Revocable trusts are not subject to federal gift tax because the donor reserves himself/herself the right to terminate the trust at any time, the gift is still under his/her control and not considered “completed.”

Terminating an Irrevocable Trust

Even irrevocable trusts may be terminated in certain circumstances. According to Section 112.054(a) of the Uniform Trust Code, trustees or beneficiaries have the right to file a suit for modification or termination of their trust.

A modification of the trust may be deemed necessary for the following reasons:

  • Removal of corporate trustees
  • Appointment or removal of trustees outside of court
  • Drafting mistakes in the trust agreement
  • Change in federal or state tax law
  • Change of situs of governing law
  • Split a large trust into separate trusts
  • Combine smaller trusts into one
  • Modify rights and authority for beneficiaries
  • Add special protection for beneficiaries due to unforeseen personal or financial circumstances
  • Extend termination date for tax or asset protection purposes
  • Remove grantor status or convert into grantor trust
  • Improve poorly administered life insurance trust
  • Add special needs provisions

Irrevocable trusts are typically created outside of the testator’s estate and are subject to gift tax laws. This does not apply to life insurance trusts. The amount of tax impact an irrevocable trust has depends on its terms and whether the trust ends at the person’s death or will be carried on by their heirs.

All income generated by an irrevocable trust is subject to income tax. The income will be distributed among the beneficiaries and will be deducted from the trust’s taxable income.

To revoke and/or terminate an irrevocable trust, the settlor and all beneficiaries must express consent. If one party seeks modification of the trust against the interest of another party, the petition will need to be brought before a court to decide.

Under the doctrine of merger, a trust is considered terminated as soon as one party gains possession of the legal and equitable title to the trust property. A trust is also terminated once all money therein has been spent by the trustees.

A testamentary trust can only be terminated if the material purpose no longer exists. If for instance, the trust was set up to pay for the children’s education, it cannot be terminated until the children have received said education.