Despite its name, an irrevocable trust is not set in stone. Under the right circumstances, you can terminate, dissolve, or modify an irrevocable trust in California. However, doing so is usually not as simple as terminating or modifying a revocable trust. Under some circumstances, such as fraud or undue influence in the creation or revision of a trust, it may be proper to challenge an irrevocable trust and ask the court to dissolve it.
While the settlor of a revocable trust may modify or dissolve that type of trust at any time, it is more difficult to modify or revoke an irrevocable trust. An irrevocable trust is established to protect assets from certain creditors and estate taxes in ways not available to a revocable trust.
A revocable trust in California may be changed or dissolved by court order or with the consent of every trust beneficiary. The attorneys at Albertson & Davidson, LLP help individuals and families in California modify and dissolve improperly performing trusts. We also assist with disputes that require contesting a trust.
Understanding Irrevocable Trusts
There are multiple types of irrevocable trusts and reasons to establish them. Irrevocable trusts are generally set up to minimize estate taxes, protect assets, and/or access government benefits, such as Medicaid. An irrevocable trust moves assets from the ownership and control of the trust settlor to the trustee. Placing assets in a trust reduces the value of the settlor’s estate and limits access to assets by creditors and others. For these reasons, certain safeguards are implemented to prevent the modification or dissolution of irrevocable trusts.
Assets in an irrevocable trust may include financial accounts, real estate, personal property, a life insurance policy, and/or a business. The settlor establishes terms for managing the trust, names one or more trustees to manage the trust, and sets rules for distributing wealth generated by trust assets to named beneficiaries.
Establishing an irrevocable trust eliminates the settlor’s ownership of assets in the trust, but certain trusts allow the settlor to be both a trustee and a beneficiary.
Individuals whose professions make them vulnerable to lawsuits, such as doctors or attorneys, sometimes protect assets by placing them in irrevocable trusts. Assets transferred to the trust are owned by the trust for the benefit of its beneficiaries. This sometimes protects them from legal judgments and creditors because the beneficiary has no right to order a distribution.
A Medicaid trust allows the settlor to leave their money to their beneficiaries rather than spend it on long-term residential health care. The trust shelters the settlor’s assets and limits their income so they qualify for Medicaid to pay their nursing home costs. The settlor’s beneficiaries receive the trust assets upon the settlor’s death. These trusts are often complex because they involve state and federal laws.
When or Why Should an Irrevocable Trust Be Dissolved?
When establishing an irrevocable trust, it is prudent to include a statement in its bylaws that the trust will automatically dissolve if its purpose has been fulfilled or ceases to exist. This allows for the natural termination of the trust and the reallocation of any remaining trust assets without having to involve court intervention.
An active trust should be dissolved if it was established illegally, such as through fraud, undue influence, or duress upon the settlor or the settlor’s lack of mental capacity. There are financial risks to challenging a trust – you could lose your right to benefit from the trust – but sometimes filing a trust contest is your only option for recovering your rightful inheritance.
To terminate an active trust, a party with standing must petition the court and provide evidence that persuades a judge to issue an order dissolving the trust or all beneficiaries of the trust must agree to its termination.
California’s Legal Framework for Dissolving an Irrevocable Trust
California’s Probate Code allows for the modification and termination of trusts when:
- The trust is revocable by the settlor.
- All beneficiaries of an irrevocable trust consent to modification or termination of the trust. If applicable, a guardian ad litem may speak for an incapacitated, underage, unascertained, or unborn beneficiary. If continuing the trust is necessary to carry out a material purpose of the trust, it cannot be modified or terminated unless the court determines that the reason for doing so under the circumstances outweighs the interest in accomplishing a material purpose of the trust.
- The fair market value of the principal of a trust has become so low in relation to the cost of administration that continuation of the trust under its existing terms will defeat or substantially impair the accomplishment of its purposes.
- Owing to circumstances not known to or anticipated by the settlor, the continuation of the trust under its terms would defeat or substantially impair the accomplishment of the purposes of the trust. The court may decide to terminate or modify the trust.
- The trust continues after the expiration of the longer of the periods allowed by statutory rules against perpetuities.
A trust automatically terminates under California law when any of the following occurs:
- The term of the trust expires.
- The purpose of the trust is fulfilled.
- The purpose of the trust becomes unlawful.
- The purpose of the trust becomes impossible to fulfill.
- A revocable trust is revoked.
Upon termination of a trust, the trustee continues to have the powers reasonably necessary under the circumstances to resolve the trust’s affairs.
How Our Trust Revocation Attorneys Can Help
The attorneys of Albertson & Davidson can help you gather, prepare, and file the required documents to dissolve a trust. We can also stand and speak for you in a hearing.
Before filing a petition to dissolve a trust, we would review the terms of the trust and advise you about tax consequences and any additional impact of terminating an irrevocable trust.
We would work with you to gain the support of all beneficiaries or recommend strategies for addressing opposition to terminating the trust if the case becomes a trust contest instead of a dissolution request.
Upon dissolution of the trust, we can provide additional counsel and assistance with the final distribution of the trust’s assets.
We will work with you from start to finish to dissolve an irrevocable trust that no longer serves a legitimate purpose. Our legal team has extensive litigation experience in courtrooms throughout California helping individuals and families dissolve irrevocable trusts by mutual consent and contesting faulty trusts. The attorneys of Albertson & Davidson have recovered more than $130 million in court verdicts and negotiated settlements for our clients.
Contact a Trust Dissolution Lawyer in California
Attorneys Stewart Albertson and Keith Davidson at Albertson & Davidson LLP are trial lawyers who focus on trust and estate litigation. We can advise you about the terms of a trust you are a party to and the advantages and disadvantages the trust creates for you. If appropriate, we can help you seek termination of an irrevocable trust that is not performing as it should.
If you have questions about an irrevocable trust that you are a trustee or beneficiary of, contact us for a free initial consultation. We have offices in Los Angeles, Bay Area, Orange County, and Silicon Valley to serve clients throughout California. Contact Albertson & Davidson online or at (877) 632-1738. We stand. We fight. We win.
