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What Happens If I Break a Trust?

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breaking a trust

breaking a trust

Breaking a trust refers to one party unilaterally dissolving a trust and distributing its assets, either back to the original donor or to the trust’s beneficiaries. This can only happen at the direction of the trust’s creator. If a third party, such as a beneficiary, wants to end the trust that person has a few options beyond suing to prove fraud or some other form of wrongdoing. In that case, the court will dissolve the trust at its own discretion. If you have questions about your trust, consider working with a financial advisor who specializes in estate planning.

What Is a Trust?

A trust fund is a way of holding assets on behalf of either yourself or someone else. When you create a trust you deposit assets into it, set terms for how the trust will manage those assets and name the beneficiaries who will receive or benefit from those assets over time.

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Individuals can use trusts in a wide variety of ways. In some cases, people may use trusts to structure their own income and assets, creating a durable form of financial planning. In others, they may use trusts as a way to structure giving among family, friends and other beneficiaries. Often, people use trusts as a form of estate planning, creating a trust that will hold and distribute assets on behalf of their heirs after they die.

In all cases, the nature of a trust is the same. This is a legal entity that exists independently. A trust can own and manage assets and must do so according to the instructions set out by the trust’s founder. The trust is managed by its trustees, individuals who oversee the fund’s holdings and distribute assets to the trust’s beneficiaries as appropriate. Since trusts exist as their own legal entities they can survive after the death of their founders. Indeed, this is why they are popular as a form of estate planning.

Types of Trusts

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There are two main forms of trust, revocable and irrevocable. With a revocable trust, the founder can change the terms of the trust at any time. They can access and manage the trust’s assets and they retain full control over the trust up to and including in their will. This authority does not pass to the founder’s heirs, however, so once the trust’s founder is dead the trust becomes effectively irrevocable.

With an irrevocable trust, the founder cannot change the terms of the trust once it has been established. They cannot access or manage its assets and they cannot make any changes to the entity or its beneficiaries.

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What Is Breaking a Trust?

breaking a trust

breaking a trust

The phrase “breaking a trust” which is not a term of art among lawyers, refers to the unilateral dissolution of a trust fund that has already been established. This can only be done by the trust’s founder. A trust’s founder can choose to unilaterally break, or “dissolve,” a revocable trust at any time on his or her own authority. The founder’s heirs cannot do so after the founder’s death, nor can the trustee or beneficiaries do so at any time. Once a trust is dissolved, trust assets are distributed as the founder sees fit. This can mean distributing assets among the trust’s beneficiaries, reclaiming the assets for themselves or some combination of the two.

With irrevocable trusts, no party can unilaterally break the trust. This includes the trust’s founder. That said, some states allow a trust’s founder to break an irrevocable trust with the written permission of all beneficiaries. In that case, once again, the assets would be redistributed at the founder’s discretion.

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Finally, a trust can be broken based on terms that the founder set when they created it. For example, a trust may have instructions to distribute all assets and dissolve when the beneficiaries reach a certain age or when it reaches a certain amount of assets on deposit.

In those cases, once the terms of the trust are met, it will distribute its assets as the founder instructed and then dissolve. This applies to both revocable and irrevocable trusts. It is questionable whether this is properly considered “breaking” a trust based on the common usage, but again this is not a term of art.

Can Third Parties Break a Trust?

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No third party can unilaterally dissolve a trust fund. Neither the trustees nor the beneficiaries can dissolve a trust and distribute its assets on their own authority. If they or any other third parties want to end a trust, typically their only recourse is to sue the trust itself.

This lawsuit is known as “contesting the trust.” It is similar to contesting a will and courts review these claims in much the same way. The court will decide whether there are grounds to set aside the terms of the trust and it will typically only do so if the plaintiffs can show fraud, coercion or other forms of impropriety in how the trust was formed. The result is that, like will contests, trust contests are rarely successful, since most claims boil down to plaintiffs who are unhappy with the terms.

If a court does find reasons to set aside the terms of a trust, the judge will take action as they deem appropriate. This can range from modifying the terms of the trust all the way to dissolving it entirely. None of this is considered “breaking” the trust, as it is not a unilateral action by one party but rather an act of law by the courts.

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The Bottom Line

breaking a trust

breaking a trust

Breaking a trust occurs when one party unilaterally ends a trust and redistributes its assets. This can only be done by the trust’s creator and only with a revocable trust. In all other cases, if third parties want to end a trust or challenge its terms they must sue in court. Whether you create a trust or are the beneficiary of one, it’s important to understand how they operate.

Tips for Estate Planning

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  • Trust funds are an invaluable tool for long-range financial planning. However, expert advice is even more valuable still. You can work with a financial advisor to help with all of your financial needs, from investment management to estate planning. Finding the right advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • Before you think about breaking a trust, what exactly is a trust fund? How does it work and can it help you? You may find a use for the trust without having to try and break it. Consider these different types of trusts and use cases.

Photo credit: ©iStock.com/MCCAIG, ©iStock.com/Edwin Tan, ©iStock.com/courtneyk

The post What It Means to Break a Trust appeared first on SmartAsset Blog.

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