A "trust" is created when you (the "settlor"), transfer ownership of certain property or assets to a "trustee." The trustee, in turn, holds the property for the benefit of a third party (the "beneficiary"), that you named.
There are two main types of trusts:
- A "living trust" (or "inter vivos" trust), which is made while you are alive and usually gives you some power or control over the income made by the trust, and
- A "testamentary trust," which usually is made as part of a settlor's last will and testament and does not begin to operate until after the settlor dies
In addition, living trusts either can be:
- "Irrevocable," meaning that it can't be changed ("modified") or cancelled at any time unless the settlor and the beneficiaries agree to it, or
- "Revocable," that is, it can be changed or cancelled at any time by the settlor
If and when a trust can be modified or terminated is controlled by many factors. If you have questions about this, you need to pay special attention to the trust document itself, the estate and trust laws of the state where the trust was created, and decisions from the probate or family courts in that state. Of course, an estate planning or probate attorney can help you with any problems you might have with modifying or terminating a trust.
A testamentary trust is irrevocable. However, because it is part of your will, and like the will, it does not have any effect until after you die, you can change or amend the will - and the testamentary trust contained in it - in any way you want.
So, modification of testamentary trust usually comes up only when the trust, as written, can't achieve the settlor's goal or intention. For example, if you're testamentary trust is meant to provide for the education and support of your child, but after you die the amount of money that you've told the trustee to pay is not enough for the child's education and/or support, a court is likely to modify or change the trust so that your intentions are carried out.
When does it terminate or end? Testamentary trusts usually state specifically when the trust will end, such as when the beneficiary dies or completes his or her education. Some trusts and state laws authorize a trustee to distribute the entire trust, if the value of the trust falls below a minimum value and continuing the trust would defeat or substantially impair the accomplishment of the trust's goal.
In some states, the beneficiaries have the power to terminate a trust early by consent, if all of the beneficiaries of the trust are "sui juris" - that is, mature enough to handle their own affairs - and all agree to terminate the trust. An exception to this is when the trust still has an uncompleted material purpose, such when it is a "spendthrift trust" - a trust that provides for the beneficiary's support but does not allow the beneficiary to assign, or give away, future payments and limits the ability of the beneficiary's creditors to look to the trust for payments of his or her debts.
If you're making a living trust, it needs to state clearly whether it is revocable or irrevocable, and if it's revocable or amendable, how it can be revoked or amended. In some states, a living trust will be considered to be revocable unless it expressly states that it is irrevocable. In other states, the rule is the complete opposite.
An irrevocable living trust, generally, can't be modified or revoked without the consent of the settlor and the beneficiary.
In some states, a revocable trust can be amended, unless the settlor provides otherwise. If a trust expressly retains the right to revoke or amend or modify the trust, it should set forth how. Some common methods include requiring that:
- The revocation or amendment be in writing
- The settlor's signature be witnessed or notarized, or
- The trustee consent to the revocation or amendment
If a trust is revocable but not amendable, it can be amended indirectly by a two-step process:
- Revoke the original trust and transfer the assets to the settlor, and
- Create a new revocable trust with the assets, and include in the new trust the desired amendment and a provision that allows the new trust to be amended and/or revoked
If you, as the settlor, retain the right to revoke the trust, then you can, during your lifetime, terminate the trust by revoking it. You will not need not need the consent of the beneficiaries.
In many instances, the trust will terminate on the date specified in the trust, or when a certain event happens, like the death of the beneficiary. In the case of an irrevocable trust, state law may allow the beneficiaries to terminate the trust early, if the material purpose of the trust has been completed or if it has not, if the settlor is living and consents to the termination.
Questions for Your Attorney
- Is it better for me to make a testamentary trust or a living trust?
- Should I make my living trust revocable or irrevocable?
- Do I need to change my trust if I have another child after the trust was made?