Can an Irrevocable Trust Be Liquidated?

by Phil M. Fowler

An irrevocable trust is a type of legal estate planning tool that creates a permanent relationship for the ownership, management and distribution of property held in the trust. Unlike the grantor of a revocable trust, the grantor who creates an irrevocable trust cannot unilaterally terminate the trust. However, the trustee and beneficiaries can liquidate the trust by unanimous consent or on the occurrence of the right conditions.

Trust Instructions

A trust operates according to the management and supervision of a trustee, and the trustee operates according to the terms of the trust document for instructions. The trust document contains the instructions from the grantor. If the trust instructions direct the trustee to liquidate the trust, then the trustee will do so at the right time. The terms and instructions for each trust vary from one another, so you will need to examine the specific trust in question to determine whether the instructions contain a provision for liquidation by the trustee.

Condition Precedent

It is common for trust agreements to contain a condition precedent to trigger liquidation of the trust. If the condition precedent happens, the trustee will liquidate the trust. If the commission precedent does not happen, the trustee will not liquidate the trust. Again, the terms of each trust vary, so you will need to examine the trusting question. An irrevocable trust, for example, may provide that the trust must liquidate the trust and distribute all property to the beneficiary upon the beneficiary's graduation from college, or marriage, or some other trigger event.

Judicial Order

State laws give judges authority to intervene, manage and, if necessary, liquidate irrevocable trusts even if the trust instructions don't provide the judge with this authority. A judge does not necessarily have to follow the trust instructions like a trustee does. If you can successfully persuade a judge that liquidating an irrevocable trust is necessary or most beneficial for the trust beneficiaries and is in harmony with the grantor's intents and purposes in creating the trust, then the judge can do so.

Consent

While the grantor does not have unilateral authority to liquidate, terminate or amend the terms of an irrevocable trust, the trustee and beneficiaries combined do have that authority. The trustee and beneficiaries can all consent to the liquidation of the trust. As long as all interested parties consent to the same manner and method of liquidation, the liquidation can proceed. A court order is not required if all beneficiaries and the trustee consent.

References

  • "Make Your Own Living Trust"; Denis Clifford; 2009

Photo Credits

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