Trusts are complicated and often hard to understand. This is particularly the case if you don’t deal with them often. To further complicate matters there are many different kinds of trusts. An irrevocable trust is one such kind. In this article, we’ll explain what an irrevocable trust is and discuss whether you can terminate one.
What is a Trust?
A trust consists of four components:
- Grantor: (also known as settlor or trustor) is the person who creates the trust.
- Trustee: The person or entity (e.g. a company or bank) that agrees to hold the assets.
- Beneficiary: The people or person who will receive the assets from the trust.
- Principal: This is the assets which are held and managed by the Trustee.
Put simply, a trust is a legal relationship where one party holds assets on behalf of another party to eventually distribute to a third party. These parties are often people but can also include companies and other entities. Additionally, it is important to note that a trust is a legal relationship rather than its own entity.
Example
Person A wants to leave assets to their children. Accordingly, person A writes in their will that upon their death all their assets are to form a testamentary trust with their child as beneficiary. Thus, on person A’s death, all of their assets will form part of a testamentary trust. This could have a bank or person named as trustee. In the meantime, the trustee holds the assets. Then, when the child is eligible, they give them to the child.
What is an Irrevocable Trust?
An irrevocable trust is a kind of trust with terms which cannot be modified or terminated without the permission of the named beneficiary. This is because in creating an irrevocable trust a grantor loses all legal ownership of the assets. The main advantage of an irrevocable trust is that the trust assets are sheltered from some taxes.
Can I Terminate an Irrevocable Trust?
Whilst by definition it cannot be revoked, there are some exceptions to this rule. If you find yourself needing to terminate an irrevocable trust it is best to try and contact the lawyer who created the trust. This will often be obvious from the trust deed. If you cannot find who created the trust, then you should compile all relevant trust documents and seek legal advice.
Some examples of instances in which an irrevocable trust may be terminated include:
- Where the trust deed explicitly states a process for termination;
- If the trustee and the beneficiary become the same person and there are no other beneficiaries;
- Something unconscionable or illegal has occurred in the managing of the trust assets;
- The trust assets have already been distributed; or
- Upon receipt of consent from all beneficiaries.
Summary
In summary, a trust is a legal relationship where a trustee holds property on trust for beneficiaries. An irrevocable trust is a type of trust which has terms that cannot be modified or terminated. That said, in some circumstances, you may be able to terminate it. However, whether this can occur will depend on the individual trust and circumstances. If you think you might want to terminate an irrevocable trust it is best to seek professional legal advice.
