How to Dissolve a Trust

Understanding revocable vs. irrevocable trusts

There are a few main differences when it comes to revocable vs. irrevocable trusts, including flexibility, the level of control, asset protection, and taxes. Both are living trusts, but they vary greatly in terms of how they’re used and the benefits they offer.

A revocable trust: 

• Is easily altered or terminated by the grantor during their lifetime.
• Helps beneficiaries avoid probate court in the event of the grantor’s death.
• Is commonly used for flexible estate planning, where the grantor can modify the assets, beneficiaries, and terms at any time.
• Doesn’t fully protect assets from creditors and may have estate and income tax consequences.

An irrevocable trust: 

• Typically cannot be easily altered or terminated.
• Is considered an independent legal entity once it’s created, meaning that the grantor usually has no control over the trust’s assets.
• Allows grantors to dictate how their assets are distributed after their death, assuring that their property goes to the beneficiaries they choose and avoids probate.
• Helps to protect assets and avoids estate taxes.

The dissolution process differs depending on the type of trust and the applicable law.

How to dissolve a revocable trust

Dissolving a revocable trust is fairly straightforward and can be done in five easy steps. 

Note that the process outlined here is dependent on the grantor being alive; once the grantor of a revocable trust passes away, the trust becomes irrevocable.

(To learn how to dissolve a trust after death, consult the next section, where we break down the dissolution process for an irrevocable trust.)

1. Review the trust document

It is recommended that revocable trusts include clauses outlining specific termination procedures. Check your trust to make sure that these provisions are included, as you’ll need to follow the instructions noted in the document. 

2. Consult an estate planning attorney

It’s a good idea to have a lawyer review your existing trust and guide you through the process of dissolution. An estate planning attorney is well-versed in state law and guidelines and can ensure that you’re following the proper instructions outlined in the existing trust document. 

Terminating a revocable trust may have tax consequences for the grantor or the trust’s beneficiaries, whether that’s income tax, estate tax, or gift tax. A tax professional can help you better understand the tax implications for your specific situation.

3. Remove assets from the trust

Now it’s time to defund the revocable trust, which involves transferring ownership of trust property either back to the grantor or to the designated individuals. You must remove all the assets from a trust for it to be considered dissolved.

4. Execute a trust revocation document

Prepare a written statement declaring the revocation of the trust. It should include all pertinent information, such as the name of the trust, grantor, trustee, and beneficiaries, as well as a trust revocation declaration. The grantor must sign and date this document.

Your estate planning attorney can help you draft a formal trust revocation form, also known as a trust dissolution form. Downloadable versions of this form can also be found online, but having a legal professional create or at least review yours can give you peace of mind that your trust dissolution form is in compliance with state law, that it includes a trust revocation declaration, and that it uses the correct wording.

Depending on your state, you may need to get the trust revocation form notarized and/or file it with the probate court. These steps aren’t always required, so make sure to check with your attorney and local jurisdiction.

5. Notify relevant parties

It’s important to notify all parties involved in the trust—such as beneficiaries and trustees—that it has been dissolved. This may also naturally happen during Step 3, if the ownership of assets was transferred to certain beneficiaries. 

Share the revocation form with the trustee so that they are informed of the dissolution and can close any trust accounts with the relevant financial institutions.

How to dissolve an irrevocable trust

The term "irrevocable trust" may sound as if you cannot change or terminate it once it's created, but that isn't always true. Generally, this trust is, indeed, permanent, but you may be able to dissolve one under certain circumstances. Due to the nature of these types of trusts, the dissolution process is typically more complex, but it can still be completed through the following steps:

1. Review the trust’s terms

Some irrevocable trusts contain language that allows for their dissolution if the purpose of the trust is no longer feasible or if maintaining the trust becomes too expensive to administer and still further its purpose. Even in these instances, however, dissolution or modification of the trust typically requires court intervention to formally dissolve the trust. In such circumstances, the trustee or beneficiaries may petition the court to intervene. There are typically limited scenarios in which dissolving an irrevocable trust is allowed, so reviewing your trust’s clauses is crucial before moving forward with the process. 

Alternatively, the trust documents may name a trust protector, who monitors the trust and decides whether to petition the court for dissolution or modification. If the trust has a trust protector, that individual may file a request with the court to dissolve the trust.

2. Consult an attorney

One overriding consideration regarding the dissolution of an irrevocable trust is your jurisdiction's laws. First and foremost, be sure which state law governs the trust. This is where having the assistance of a legal professional is immensely helpful.

State statutes concerning the execution of the dissolution of an irrevocable trust vary greatly, so it is critical that you comply with all applicable laws. A lawyer with experience in estate planning matters and state law, such as those in the LegalZoom attorney network, can help you understand the terms of the trust, provide insights on the tax implications of trust dissolution, and guide you through how to dissolve a trust seamlessly using legal documents. 

It may also be in your best interest to consult a financial advisor who can help you understand and prepare for potential tax liabilities. To get an overview, refer to the Internal Revenue Service’s e-filing guidance for estates and trusts.

3. Talk to beneficiaries

Some jurisdictions allow for the dissolution of an irrevocable trust if all beneficiaries—in addition to the trustor, if applicable, and trustee—unanimously approve to terminate it. Depending on the circumstances, dissolving the trust may not be possible if even one of the beneficiaries refuses to agree or if you cannot locate all of the beneficiaries to obtain their consent. Even with unanimous approval from all relevant parties, you will likely need to file a petition with the probate court to dissolve the trust. 

4. Petition the court for approval

Some states don’t require filing a court petition if all parties approve the dissolution—but some jurisdictions mandate judge review even with unanimous approval. This is where you’ll share your reasons for dissolving the trust, providing evidence that dissolution aligns with the best interests of the beneficiaries.

Generally, a judge examines the agreement and your provided evidence to ensure that no material terms of the trust would be violated by dissolving it. Court approval may happen in several instances, including (but not limited to) the following:

• The trust's purpose has become illegal
• The trust beneficiary was an organization that has dissolved
• The trust’s purpose can no longer be fulfilled
• Financial circumstances make the operation and administration of the trust no longer viable

5. Complete asset disposition

The final step, if applicable, is to distribute the assets to all beneficiaries, transferring ownership if necessary. The trustee must distribute the assets according to the trust document’s provisions.

How much does it cost to dissolve a trust?

The cost to dissolve a trust depends on the type of trust, the complexity of the process, and whether professional assistance is needed. Generally speaking, dissolving a revocable trust should be less expensive, often involving limited legal assistance, notarization fees, and court filing fees (if necessary). On the other hand, dissolving an irrevocable trust is more expensive, as this complex process typically requires the help of an attorney, incurring higher fees. 

Here is a breakdown of the potential costs involved, with ranges provided to account for varying fees by state:

• Trust document review: $200–$500/hr (depending on your attorney or service)
• Creation of a trust revocation form: $200–$500/hr (depending on your attorney or service)
• Notary fee: $2 to $25
• Court petition filing fee: $50 to $1,000+

Other fees may include those related to filing new deeds when transferring ownership, settling outstanding financial obligations of the trust, and notifying relevant parties of the trust dissolution (whether by certified mail or through public notice). 

Additionally, there may be tax consequences upon removing assets from the trust, as this process may trigger estate taxes, capital gains taxes, or income taxes. 

Common reasons to revoke a trust

There are several reasons why someone might want to understand how to revoke a trust: 

• There has been a change in family dynamics, such as divorce, marriage, or adoption.
• The financial status or personal intentions of the grantor have changed.
• The trust has achieved its intended purpose, rendering it unnecessary.
• The complexity or cost of maintaining the trust outweighs its benefits.
• The grantor moves to a new state with different laws on trusts, estates, and inheritance.
• There are so many extensive changes that it would be easier to dissolve the existing trust and create a new one.

Remember that when dissolving an irrevocable trust, some of these reasons might not hold up in court. 

Whether you’d like to set up a living trust or dissolve an existing one, consider estate planning advice from LegalZoom to ensure that you’re in compliance and can safeguard the future of your estate.

FAQs

How long does it take to dissolve a trust?

Depending on the type of trust and the complexity of the trust’s assets, it may take anywhere from a few weeks to a few months to dissolve a trust. Irrevocable trusts will likely take longer to dissolve, as the dissolution process is more involved.

What are the consequences of dissolving a trust?

Dissolving a trust may result in tax consequences for the grantor and/or the beneficiaries. When trust assets are distributed or they transfer ownership, certain taxes may apply, such as income, estate, or gift taxes.

Who has the most power in a trust?

With a revocable trust, the grantor holds the most power; they can make changes to or dissolve the trust during their lifetime. With an irrevocable trust, the trustee typically has the most power, as they are in charge of managing the trust and acting on behalf of the beneficiaries.

Why would someone want an irrevocable trust?

Irrevocable trusts are beneficial for some because they protect trust assets from creditors, minimize estate taxes, and typically don’t affect your beneficiaries’ eligibility for government programs like Medicaid. Although an irrevocable trust has less flexibility than a revocable trust, it can be a good estate planning choice for many.