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.”

Why Consult a Probate Attorney for Trust Termination?

While it’s possible for a trustee or beneficiary to initiate the termination of a trust, the legal landscape is rarely straightforward. Texas statutes may outline procedures, but courts can interpret the rules differently or encounter unique circumstances that complicate matters. For this reason, working with a knowledgeable probate attorney is highly recommended.

An experienced attorney can help you:

• Navigate ambiguous or conflicting trust provisions
• Ensure that all legal requirements for termination are met
• Minimize the risk of disputes among beneficiaries or with the trustee
• Address any tax consequences or unforeseen complications
• Advocate for your interests in court, if judicial approval becomes necessary

Trust termination is an important legal process with lasting financial implications. To avoid costly mistakes and ensure the process proceeds as smoothly as possible, seek professional guidance before moving forward.

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 a 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.

The Role of Powers of Attorney and Guardians in Trust Termination

If a settlor becomes incapacitated, the process for terminating a trust depends on the legal tools and authorizations in place.

In cases where the settlor has executed a power of attorney, the person named as agent may have authority to act on the settlor’s behalf—but only if the power of attorney document specifically grants the power to modify or terminate the trust. If this authority isn’t clearly outlined, the agent’s hands are tied, and they cannot take such actions.

For settlors under guardianship, the guardian may step in, but only with court supervision. The court overseeing the guardianship must review and approve any decision to change or dissolve the trust before the guardian can proceed.

In short, both powers of attorney and guardians can play pivotal roles in these situations, but strict compliance with both the trust terms and relevant court or legal procedures is required.

How Are Trust Assets Distributed After Termination?

When a trust comes to an end, the way its assets are distributed depends on the specific circumstances of its termination and the terms set out in the trust agreement.

If the trust holds less than $50,000 in assets, Texas law allows the trustee to end the trust without court involvement. In these cases, the trustee typically notifies all beneficiaries and ensures the assets are distributed according to the purpose originally intended for the trust. This process is designed to avoid the ongoing expense of administration if it’s no longer practical.

For trusts with more assets, or in situations where beneficiaries wish to end or modify the trust without the settlor’s consent, court involvement is usually required. The court will evaluate whether terminating the trust serves the best interests of all parties while honoring the trust’s underlying purpose. If the judge grants the request, they will issue an order outlining how the trust property is to be allocated among the beneficiaries.

No matter the method of termination, assets are generally divided in accordance with the trust’s original terms, the intentions of the settlor, and any court directives. Beneficiaries should expect to receive their distributions only after all costs, taxes, and obligations of the trust have been satisfied. In short, termination doesn’t mean a free-for-all—clear procedures ensure assets land where they were always meant to go.

When the Court Can Step In to Terminate a Trust

But what if continuing the trust simply doesn’t make sense anymore? Texas courts can, in certain circumstances, step in to modify or even terminate a trust—regardless of the value of its assets. If unforeseen circumstances arise that were not anticipated by the trust’s original terms, and making a change would better serve the trust’s intended purpose, a court has the authority to act.

Additionally, a trust that holds more than $50,000 isn’t untouchable. If managing the trust has become impractical or wasteful—say, if administration fees are eating up nearly all the income the trust generates—the court may intervene. In these cases, the court can order termination if it determines that doing so would benefit the trust and its beneficiaries. The judge will then decide how best to distribute the remaining assets in accordance with the trust’s original intent.

Get Help Terminating A Trust In Texas

Fiduciary laws regarding trusts in Texas are complex matters that should not be taken lightly. If you need help assessing and evaluating a trust for termination, we recommend contacting an experienced trust attorney. Keith Morris is here to help.

Contact Keith Morris today at (844) 878-0700 in Houston and (817) 532-6797 in Fort Worth to schedule a free consultation to discuss your legal rights in terminating a trust in Texas.