How to Terminate a Trust in Illinois

In this article, we explain how to terminate a trust in Illinois. We discuss the following:

• What is the difference between modifying and terminating a trust?
• When does a trust terminate in Illinois?,
• How do you terminate a trust in Illinois?,
• Trust termination by unanimous consent, and
• How are trust termination disputes handled in Illinois? 

A trust is both a document and a legal entity that can own property separate from its creator. Trusts are created to ensure that assets are distributed to loved ones when an individual passes away.For more information regarding the different kinds of Illinois trusts, see our other article: What is a Trust? | Illinois Trusts Explained.

What is the difference between modifying and terminating a trust?

Terminating a trust results in the total extinguishment of trust assets, whereas modification of a trust changes a portion of the trust to reflect the new intent of the settlor or to reflect changed conditions. These modifications can include clarifying a specific term, providing a trustee with additional powers, removing a trustee, or altering another term of the trust.

When does a trust terminate in Illinois?  

A trust naturally terminates when the trust’s assets are transferred from the trustee to the beneficiary. The timing of the natural termination depends on the terms outlined in the trust document. For example, if the documentation states that the trust’s assets are to be transferred to a beneficiary when he or she reaches a certain age, or when he or she graduates college, those milestones can count as the official deadline of the trust. Trusts can also naturally terminate on a specified date set by the trustee. 

A trust can be terminated before the trust’s assets are transferred from the trustee to the beneficiary for any of the following reasons: 

• Violations of duties by the trustee;
• Divorce, death, and other changes of circumstances;
• Illegal subject matter of the trust;
• Contests and disputes by or between beneficiaries;
• Trust assets decrease in value to become a small trust;
• Trust creator amends the trust; or
• Mutual agreement of beneficiaries.

How do you terminate a trust in Illinois?  

Even if a trust is considered “irrevocable,” Illinois court still has the authority to modify or revoke an irrevocable trust. Trustees and beneficiaries of an irrevocable trust can petition to have the trust modified or even terminated with a judge’s approval. Because this process can become time-consuming and expensive, the state of Illinois has enacted the Illinois Virtual Representation Statute, which allows a trustee and certain beneficiaries to modify an irrevocable trust without having to petition in court. Instead of going to court, parties can enter into a legally binding, non-judicial settlement agreement to terminate or modify the trust.

There are three forms of trust reformation; 1) modification or termination by consent, 2) modification or termination with court approval, and 3) decanting to modify or terminate the trust. For more information regarding trust reformation without termination, please see Trust Reformation In Illinois: How to Modify an Irrevocable Trust.

Illinois Trust Termination by Unanimous Consent

Step One: In order to terminate a trust, the first step is to obtain the consent of the trustee and all of the beneficiaries. It’s best to avoid conflict and litigation by informing the trustee of your intentions. Be sure to record proof of your conversation with the trustee and beneficiaries. If any of the beneficiaries are minors, consent may be given on his or her behalf by a parent or guardian. It’s important to understand that even if a single potential beneficiary refuses to consent to the termination of the trust, the termination procedure is not viable. 

Step Two: Create a form called a Revocation of Trust. Templates for this form can be found online, but it’s best to consult with an experienced trust attorney. The document should include the legal name of the trust, the name and address of the trustee, an explanation of why the trust is terminated, and an effective date. The form should also direct the trustee to surrender control of all assets in the trust to yourself or a designated agent. 

Step Three: Once you have created a Revocation of Trust, the document must be dated and signed in the presence of a witness or notary public. The witness or notary public cannot be the trustee. Typically, the effective date of the revocation is the date you sign the paper. The revocation should be appended to the original trust documents and filed away for safekeeping. 

Step Four: Send a copy of the Revocation of Trust and the original trust documents to the trustee by certified mail. If you cannot send it by certified mail, you can serve the revocation by a private delivery service or process server. 

Step Five: If the trust earned more than $600 in income, you have to file a final tax return for it. If the trust has been open for less than twelve months and you have never filed a return for it, it’s acceptable to only file one return. 

Step Six: Tie up any loose ends by sending a final accounting and letter to all of the trust’s beneficiaries. The accounting doesn’t have to be incredibly detailed if the trust contained complex assets. It’s important to communicate a clear statement of what the trust took in (if anything) and how you spent or distributed the assets. 

Once all of the expenses have been paid and the trust property has been distributed to beneficiaries, the trust simply ceases to exist. The trust termination process outside of court is fairly anticlimactic. 

How are trust termination disputes handled in Illinois? 

Trust disputes are usually resolved by filing a lawsuit in court. Remedies for trust disputes can vary, involving courses of action like: 

• A damages award, paid by the trustee to compensate for duty violation;
• A damages award, paid by the beneficiaries to compensate for duty violation;
• An injunction, requiring the trustee to transfer the property to beneficiaries; or
• A court order, allowing actions such as amending a trust 

If you want to dispute the termination of a trust, it’s best to acquire the assistance of an experienced estate attorney. Termination of a trust can result in gift, estate, generation-skipping tax, and even income tax consequences. If you have any questions regarding trust termination, please do not hesitate to contact us today.