A trust that made sense when it was signed can stop making sense. The purpose may have been fulfilled, the assets may have shrunk to the point where the trustee’s and accountant’s fees eat the income, the tax law that justified the structure may have changed, or the beneficiaries may simply agree that they would rather have the money outright. When that happens, terminating the trust is often the right answer, and New York law provides several ways to do it.
We represent trustees, beneficiaries and grantors in proceedings to end, modify or wind up trusts under the Estates, Powers and Trusts Law and the Surrogate’s Court Procedure Act, from a small irrevocable trust that has become uneconomical to a contested termination among beneficiaries who do not agree. This page explains the routes to termination, the process, the tax traps and the alternatives.
What Termination Means
Terminating a trust means ending its existence, distributing what is left to the beneficiaries and discharging the trustee. How hard that is depends on the type of trust, the language of the instrument and who is willing to consent.
A revocable trust can usually be ended by the grantor at any time during the grantor’s life by following the procedure in the trust document. An irrevocable trust is a different matter. It was designed to take the assets out of the grantor’s control, usually for tax, Medicaid or asset protection reasons, and ending it generally requires court approval, the unanimous consent of the beneficiaries, or both.
Legal Grounds for Terminating a Trust in New York
Each route has its own requirements, and choosing the wrong one can leave a trustee personally liable or hand the beneficiaries an unexpected tax bill.
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Termination by the terms of the trust
Many trusts end on their own terms: on the death of the life beneficiary, when a beneficiary reaches a stated age, or when the principal falls below a stated amount. When that happens the trustee’s job is to wind up, account and distribute as the instrument directs.
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Consent under EPTL 7-1.9
EPTL 7-1.9 lets the grantor revoke or amend an otherwise irrevocable trust with the written, acknowledged consent of every person beneficially interested in it: current, remainder and contingent beneficiaries alike. Because every beneficiary must consent, and unborn or unascertained beneficiaries cannot, the statute is narrower in practice than it reads. Where minors or unborn beneficiaries are involved, the court usually has to be brought in and a guardian ad litem appointed.
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Uneconomical trusts under EPTL 7-1.19
EPTL 7-1.19 lets a trustee or beneficiary petition the Surrogate’s Court to terminate a trust when continuing it has become economically impracticable, its purpose has been fulfilled or become impossible, or termination would best serve the beneficiaries. It is the usual route when trustee commissions, accounting fees, tax preparation and investment management consume a disproportionate share of the trust’s income or principal. The court weighs the grantor’s original intent against the practical reality of continued administration.
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Changed circumstances
New York courts have equitable discretion to modify or terminate a trust when circumstances the grantor did not foresee would otherwise frustrate the trust’s purpose. Changes in tax law, in the family or in the beneficiaries’ finances can all support this argument.
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Merger
A trust ends by operation of law when the same person becomes sole trustee and sole beneficiary, because legal and equitable title merge. This can happen by accident, and it can carry tax consequences if nobody notices.
Situations That Lead to Termination
The trusts we are asked to end tend to fall into a few patterns. The commonest is the small or depleted trust whose administrative expenses exceed its income. Next are trusts whose purpose has been accomplished, such as an education trust whose beneficiaries have all finished school, and supplemental needs trusts whose beneficiary no longer needs one. Tax law changes can strip an irrevocable trust of the benefit it was created for. Sometimes the beneficiaries unanimously prefer outright distribution, sometimes the primary beneficiary has died and the distribution provisions have been triggered, and sometimes a trustee has resigned or lost capacity and the family would rather dissolve the trust than appoint a successor. And some trusts simply contain provisions that no longer reflect what the grantor wanted or what the beneficiaries need.
The Termination Process
The path depends on whether the court has to be involved, but a typical termination follows these steps.
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Review the instrument
We read the trust for its termination provisions, its beneficiary designations and any restrictions on modification.
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Identify every interested party
Every current, remainder and contingent beneficiary has to be identified, with particular attention to minors, incapacitated persons and unborn or unascertained beneficiaries.
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Tax analysis
Early termination can trigger income, gift, generation-skipping transfer or estate tax. The analysis has to be done before anyone signs anything.
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Consents
Where consent-based termination is possible, we prepare and collect the written consents from all interested parties.
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Court petition, if needed
Where court approval is required, we file a petition in the appropriate Surrogate’s Court, serve the interested parties and appear at any hearing.
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Final accounting
The trustee provides a final accounting of all receipts, disbursements and distributions over the life of the trust.
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Distribution and discharge
Once the accounting is approved, the remaining assets are distributed and the trustee is formally released from further liability.
Tax Consequences
Tax is the most overlooked part of a termination, and it is where an avoidable bill usually comes from. Distributing appreciated assets in kind rather than selling them changes who recognizes the capital gain and when. When beneficiaries with different interests consent to a distribution that does not track those interests, the beneficiary who gives something up may have made a taxable gift. A trust that has had GST exemption allocated to it can lose that benefit. Ending a trust before the life beneficiary’s death can forfeit a stepped-up basis that would otherwise have been available. And New York’s estate and income tax rules differ from the federal ones. We work with the client’s tax advisors to structure the termination so that it achieves the goal without creating a new problem.
Contested Terminations
Not every termination is agreed. An income beneficiary who wants larger current distributions and a remainder beneficiary who wants the principal preserved have opposite interests in whether the trust continues. A trustee may resist because of genuine fiduciary concern, or because the trustee wants to keep earning commissions. Second marriages and blended families make the picture more complicated.
A contested termination is decided in Surrogate’s Court, where the judge weighs the interests of all parties, the language of the trust and the policies behind New York trust law. We petition to compel termination over a trustee’s objection, defend trustees against improvident termination requests, represent remainder beneficiaries whose interests are at risk, and negotiate settlements that allow a partial distribution while keeping the trust in place for the purposes that still matter.
Alternatives to Termination
Sometimes the problem is a provision, not the trust, and ending it altogether is more than the situation calls for. The alternatives are worth considering first.
| Alternative | When it fits |
|---|---|
| Modification under EPTL 7-1.9 | An outdated provision needs updating and everyone consents, but the trust should continue. |
| Decanting under EPTL 10-6.6 | A trustee with discretionary distribution authority moves the assets into a new trust with better terms. |
| Trustee removal and replacement | The problem is how the trust is being run, not the trust itself. |
| Agreement of all interested parties | Where every person beneficially interested consents in writing, a lifetime trust can be amended or revoked under EPTL 7-1.9, and administrative disputes can be settled by a written agreement the court will so-order. |
| Partial distribution | A beneficiary has an immediate need, but the trust should stay in place for the rest. |
Who We Represent
We act for individual and corporate trustees seeking to terminate or wind up a trust, for beneficiaries seeking distribution, for grantors who want to revoke or modify a trust they created, for guardians ad litem appointed to represent minor or unborn beneficiaries, and for family members on either side of a contested termination in the Surrogate’s Courts of New York, Kings, Queens, Bronx, Richmond, Nassau, Suffolk and Westchester counties.
Talk to Us
If you are considering ending a trust, or you have been notified that someone else is seeking to end a trust in which you have an interest, get advice before you act. A trustee who distributes without authority can be held personally liable, and a beneficiary who consents without understanding the tax consequences can receive an unexpected bill from the IRS or the New York State Department of Taxation and Finance. We will review the trust, explain the options and guide the process through. Call us at 212-233-1233 or email [email protected].
