Monday, September 01, 2008

Terminating or Modifying a Trust in Iowa

A common question that I get asked is about "breaking a trust". By breaking a trust, someone typically means doing away with a trust for some reason or changing its terms. Is it hard to do? Can it be done? Yes, it certainly can be done. The difficulty of doing so depends on the circumstances.

Terminating or Modifying a Trust in Iowa

The general background is that a trust will run its course until its objectives are reached. However, there are situations which may be applicable that affect the trust. Under the Iowa Trust Code, which is still relatively new and untested in Iowa, there are several statutory options that are available for consideration.

Terminating a Small Trust in Iowa

If the amount of the trust is relatively low and incurring costs in its administration, it is possible to terminate the trust and distribute the assets to the beneficiaries, even if the trust terms provide for the trust to continue into the future. A court would need to approve such a termination after either the trustee or a beneficiary request the court to terminate the trust. Iowa Code sec. 633A.2205 (2007). Whatever "low" value means depends on the costs involved, the argument presented to the court and the court's opinion as to what is "low enough".

Modifying a Trust in Iowa

it is possible to change an irrevocable trust. If the settlor (the person who created the trust) is still alive, so long as they consent and all the beneficiaries consent, a trust could be modified or even terminated. Court involvement is not necessary. Iowa Code 633A.2202. If the settlor is dead, there is a different procedure involved. If ALL the beneficiaries are in agreement and it isn't necessary for the trust to carry on with the same terms, a court can permit the trust to be modified or even terminated. The difficult component is getting the consent of each beneficiary. The Iowa Trust Code does provide some relief when dealing with minor beneficiaries. Iowa Code 633A.2203.


Replacing the Trustee of an Iowa Trust


This provision has some unresolved questions that may need to be clarified in the future through some legislative changes. Historically, it was difficult to remove a trustee from a trust. However, the relatively new (& untested) Iowa Trust code does provide some "gray area" that may be used to change the trustee. There is also the possibility that a trust could be amended by insertion of a provision in a trust permitting a procedure to remove a trustee. At least one court in Iowa has permitted this change.

2 comments:

Anonymous said...

If a person has a Revocable Trust and a few months later decides to change it to an Irrevocable Trust, would a simple amendment do such as: This Trust is amneded to be Irrevocable in all respects, not only to myself but to all legal representatives. This amendment is to replace the section that allows amending the Trust. These are just genaric words. But my question is can this be done by amendment similar to what I discribe or must one start out with a whole new document?
Thanks, Jim

Matthew Gardner said...

Yes, you could simply amend the trust to make it irrevocable. However, you need to be aware of and careful as to tax implications from this simple act. Be sure to get legal/tax advice first.