Termination of Irrevocable Trusts in Florida: When, Why and How
The sole reason most trusts exist is to serve the needs of the beneficiaries. Another way to put this is, the trustee represents ONLY the interests of the beneficiaries. White v. Bourne, 151 Fla. 12 (1942). When the trust no longer serves the beneficiaries’ needs, or when the purpose for which the trust was established has been accomplished or frustrated – it may be time to terminate the trust.
Example: The trustmaker sets up a trust in 1975 to provide for his 7 children and grandchildren. He transfers commercial real estate valued at $5 million into to the trust, which in 1975 is producing significant income from rent flowing from the properties. However, because of poor management, the rent monies are consumed by trust expenses and taxes. By 2015, the children and grandchildren have received a total of only $75,000 in distributions which is only about $11,000 per beneficiary over the 40 year history of the trust. During the same time, trustee fees, taxes, and trust expenses are over $1,000,000. The trust is essentially a failed trust; it has become an employment program for the trustees and few benefits have trickled down to the beneficiaries. The trust has become wasteful and impracticable to fulfill its purpose.
Note: For big red flag issues that a trust may no longer be fulfilling its purpose or not performing properly see our Report: 5 Warning Signs a Trust is Not Performing. For a summary of beneficiaries’ fundamental rights see: 10 Basic Rights if You are a Beneficiary Under a Florida Trust.II. When and Why an Irrevocable Trust can be Terminated
Non-Judicial Termination of Irrevocable Trusts
Florida has a relatively simple procedure for terminating trusts, but this provision only applies to trusts created after January 1, 2001. After the trustmaker’s death, an irrevocable trust may be terminated in whole or part upon the unanimous agreement of the trustee and all “qualified beneficiaries”. F.S. 736.0412. “Qualified beneficiaries” are generally all beneficiaries who are current beneficiaries, intermediate beneficiaries, and first-line remainder beneficiaries, whether vested or contingent. F.S. 736.0103(16).
Judicial Termination of Irrevocable Trusts
Upon the petition of a qualified beneficiary or trust, the court may terminate a trust in whole or in part if:
- The purposes of the trust have been fulfilled or have become illegal, impossible, wasteful, or impractical to fulfill;
- Because of circumstances not anticipated by the settlor, compliance with the terms of the trust would defeat or substantially impair the accomplishment of a material purpose of the trust; or
- A material purpose of the trust no longer exists. F.S. 736.04113(1).
Other Grounds for Termination
There may be three other grounds for terminating a trust; these are:
- Small Trusts or Trusts under $50,000. If the trust assets have become so small that it is not economical to administer. The trustee is authorized to terminate a trust under $50,000 in value according to F.S. 736.0414(1). The court can terminate a trust if “the value of the trust property is insufficient to justify the cost of administration.” F.S. 736.0414(2).
- Fraud, Duress, Mistake or Undue Influence. If the trust was created as the result of any of these factors, it can be terminated. F.S. 736.0406.
- Merger of Interests. When legal and equitable interests of the trust have merged, it can be terminated. Ex: The only asset owned by the trust is a single family home. Joe is the trustee and sole beneficiary. If Joe transfers title for the home to himself, the legal and equitable title have merged and the trust terminates.
Florida law does allow for non-judicial (outside of court) termination of irrevocable trusts as mentioned above for trusts established after January 1, 2001 provided the trustees and all qualified beneficiaries agree. F.S. 736.0412. Also, the trustee is authorized to terminate a trust under $50,000. F.S. 736.0414(1). In such cases, it is advisable for the trustee to prepare an Agreed Plan of Distribution and have all qualified beneficiaries sign the plan and fully release the trustee. Essentially, court petition and approval is required to terminate all other trusts.IV. Other Options to Consider
Termination of irrevocable trusts is not the only option for beneficiaries or trustees. Other legal remedies may include:
- Modification of the trust. Generally, the same rules that apply for trust termination also apply for trust modification. Note: By default, a Florida trust created after July 1, 2007 is a revocable trust and can be fully amended or restated by the settlor unless the trust expressly states otherwise. F.S. 736.0602(1).
- Decanting of the trust. Decanting is simply taking assets in an old trust and pouring them into a new trust. Essentially, the old trust can be rewritten. Florida has a useful “decanting” statute that allows a trustee who has absolute power to invade principal of the old trust to create a new trust. F.S. 736.04117. The new trust must include only the beneficiaries of the old trust and must meet other strict requirements. One great advantage of decanting is that it can be done out of court – there is no need to secure court approval if the statute is followed.
- Removal of the Trustees. If the trust is failing because of waste or because it is not producing income for the beneficiaries, the beneficiaries may wish to consider removing the trustees and replacing with trustees who can competently and efficiently fulfill the trustee duties. See our Report: 12 Point Summary of Florida Successor Trustee Duties.
The sole reason a trust exists is to serve the beneficiaries. If the trust cannot meet the needs of the beneficiaries, it may be a failed trust and should be terminated. Complex trust and tax laws control these issues. We strongly advise you consult an experienced Miramar trust attorney so you will learn the full range of your legal options. For more information, contact Phil Rarick with Rarick & Beskin at firstname.lastname@example.org or call (305) 556-5209.Special Note
The information on this blog is of a general nature and is not intended to answer any individual’s legal questions. Do not rely on information presented herein to address your individual legal concerns. If you have a legal question about your individual facts and circumstances, you should consult an experienced Miramar trust attorney. Your receipt of information from this website or blog does not create an attorney-client relationship and the legal privileges inherent therein.