Surrendering an irrevocable living trust
An irrevocable trust is established when the settlor or the individual that creates the trust transfers his or her assets into the trust, thereby relinquishing all ownership and control of those assets and is not able to modify the terms of the irrevocable trust after it has been established.
The benefit of establishing an irrevocable trust is that the assets in the trusts are no longer considered to be part of the settlor’s estate, they cannot be taxed or used to satisfy any of his or her debts. This type of trust is also very useful to individuals working in professions that are vulnerable to lawsuits, such as attorneys and physicians. However, circumstances that compelled the settlor to create the irrevocable trust in the first place may have changed over time, and, therefore, it is no longer needed.
Changes made by Congress to the estate tax and gift tax exemption from $5 million to $11 million for individuals–double that for spouses–will revert back to $5 million in 2025, though Congress could change this timeline before then.
Other changes during the settlor’s life that would lead him or her to consider surrendering an irrevocable living trust would be, for example, if he or she falls ill and needs funds for long-term care prior to the look-back period. Or, if the trust’s income is being taxed at a higher income tax bracket than that of the settlor. In that case, it would be in the settlor’s best interest to terminate the trust and invest the assets in another type of tax-deferred product, such as life insurance.
“Unwinding” an irrevocable trust when it no longer functions as it was meant to or when it is no longer needed is possible, but it must be done correctly, or it could prove costly to the settlor.
There are a few ways to go about getting rid of an irrevocable living trust. Dissolving an irrevocable trust by consent happens when all the parties of the trust, the settlor and all beneficiaries, agree to revoke it.
Dissolving an irrevocable trust by judicial modification can happen in cases where the settlor is deceased or refuses to consent to it. In these situations the trustee or beneficiary may petition the court system to do this. Courts are usually amenable to terminating an irrevocable trust as long as it’s not inconsistent with the original purpose for its creation.
In some situations, the trust itself may include instructions allowing it to be surrendered under limited circumstances. But, in all of these cases, consulting with estate planning lawyers in navigating the process is essential so that the terms of the trust are not violated.
Start the process now
There are several reasons why maintaining an irrevocable living trust may not make good financial sense. But, before making any decisions about unwinding your trust, you need to enlist the services of an experienced estate planning attorney.
At the Law Office of David W. Foley, San Diego living trust attorney, all of our attorneys are experienced in the area of estate planning and are very knowledgeable when it comes to California laws as they pertain to estate planning, trusts and trust administration.