Many of my clients choose to incorporate at least one trust agreement into their comprehensive estate plan. I also have many clients who are beneficiaries of a trust. Consequently, I spend a good deal of time discussing how a trust works and how one might fit into an estate plan. One frequent question I am asked is how long a trust lasts and when does a trust terminate. Let me take this opportunity to explain how and when a trust can terminate in Maryland.
What Every Beneficiary Should Know about Trust Agreements
Upon being named a beneficiary, you will typically receive a copy of the trust agreement, which is the legal document that establishes the trust. The individual who created the trust, known as the Settlor, Grantor, or Trustor, appoints a Trustee within this document. The Trustee can be an individual or entity (such as a financial institution) and is responsible for managing the trust assets and executing the terms delineated in the trust agreement. The trust agreement specifies critical elements, including the type of trust, whether the trust is revocable or irrevocable, the assets funding the trust, and the distribution method and schedule for the beneficiaries.
Types of Trusts: Revocable vs. Irrevocable
Understanding the type of trust is imperative for determining its potential duration and the conditions under which the trust may be terminated. A revocable living trust permits the Trustor to maintain control over the trust assets during their lifetime, with the flexibility to amend or terminate the trust at their discretion. This feature allows the Trustor to alter beneficiaries, modify terms, or dissolve the trust entirely without the need to provide a reason.
Conversely, a testamentary trust is established through the terms of a Last Will and Testament and becomes effective only upon the death of the Trustor. While the Trustor can modify or revoke the Will during their lifetime, meaning they can revoke the trust created by the Will, once the testamentary trust is activated, it generally becomes irrevocable.
An irrevocable living trust is more complicated and more difficult to terminate. Once the Grantor creates and funds an irrevocable trust, they relinquish control over the assets, and the trust cannot be easily altered or terminated unless specific conditions are met or provisions within the trust agreement allow for termination.
Maryland’s Rule Against Perpetuities: Can a Trust Last Forever?
While there are numerous ways to determine when a trust terminates, the law makes it clear that the trust cannot go on indefinitely. Like most states, Maryland has a “rule against perpetuities” that prevents a trust from lasting forever. Maryland’s rule against perpetuities, which is based on common law, generally requires trusts to end between 80 and 110 years after they are created. This common law rule states that no interest is valid unless it must vest, if at all, no more than 21 years after a life in being at the time the interest was created. This common law rule has been modified by statute and there are a number of exceptions that are too numerous to explain in this type of article.
Ways a Maryland Trust May Terminate
In the case of a revocable living trust, the Trustor of the trust can terminate the trust at any time and for any reason; however, there are other ways in which a Maryland trust may be terminated, including:
- Provisions in the Trust Agreement: The trust agreement might stipulate a specific termination date or conditions for termination. The trust agreement might even give specific people, such as the Trustee or a beneficiary, the authority to terminate the trust.
- Fulfillment of Trust Purpose: A trust may terminate once its purpose is achieved. For example, a trust established to finance a beneficiary’s education may conclude once the educational expenses are fully covered.
- Impossibility or Illegality: A trust may need to be terminated if its purpose becomes impossible to achieve or if continuing the trust becomes unlawful. Changes in circumstances or legal regulations might render the trust’s original objectives unfeasible.
- Judicial Intervention: Courts always possess the authority to terminate a trust, though judicial intervention is typically reserved as an avenue of last resort. Common judicial reasons include the trust’s purpose being fulfilled or the assets being insufficient to justify the administrative costs. In such cases, the court may order the remaining assets to be distributed to the beneficiaries.
- Mutual Agreement: In some scenarios, the Trustee and beneficiaries might mutually agree to terminate the trust. This can occur if continuing the trust is deemed impractical or if its purpose has been effectively served.
Do You Need Help Figuring Out How to Terminate a Trust in Maryland?
For more information, please contact our estate planning office in Owings Mills, Maryland by calling 410-654-3850 to schedule an appointment.
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