TERMINATING AN IRREVOCABLE TRUST IN NEW YORK

May 16, 2024

While much has been written about amending or decanting irrevocable trusts, terminating a trust before the trust term expires in New York can also be done under certain circumstances. If you have ever created a trust, served as a trustee, or have been a beneficiary of a trust, you know that while there can be many benefits to having a trust structure in place, there can also be compelling reasons to terminate a trust before its stated term when it no longer serves its intended purpose. Trusts are generally created with a purpose or goal in the mind of the creator of the trust (the “Grantor”). Such purposes may include tax savings, protection from potential creditors or predators, and/or protection of the trust assets from the trust beneficiary while he or she is under a certain age or maturity level. While trusts can be created for a term of many years, or even for a beneficiary’s lifetime, changed circumstances in a person’s life or changes to the tax law may cause the purpose of the trust to become fulfilled or become moot.

If the trust in question was made or administered under the laws of the State of New York, and parties to the trust would like it to be terminated, there are procedures outlined in the Estate Powers and Trust Law (“EPTL”) that allow for the termination of a non-charitable irrevocable trust.

Pursuant to EPTL §7-1.9 Revocation of Trusts, a trust may be terminated by the Grantor upon the written consent of all persons with a beneficial interest, signed with the same formalities necessary to execute the conveyance of real property. 

“Upon the written consent…of all the persons beneficially interested in a trust of property, heretofore or hereafter created, the create[o]r of such trust may revoke or amend the whole or any part thereof by an instrument in writing.” EPTL §7-1.9.

If the trust was recorded in any office within the State of New York for any reason, the instrument revoking the trust must also be recorded in the same office.

If the Grantor is no longer living, or if the trust document does not provide for the ability to revoke the trust, the person seeking to terminate the trust may make an application to the court under the appropriate circumstances pursuant to EPTL § 7-1.19 Application for Termination of Uneconomical Trust. EPTL § 7-1.19 provides that a Trustee or beneficiary may make an application to the appropriate Surrogate’s Court for permission to terminate the Trust when it is no longer economical to do so.

The court will determine whether continuing the trust is “economically impracticable” if the following conditions are met:

• The express terms of the disposing instrument do not prohibit its early termination;
• Terminating the trust would not defeat the specified purpose of the trust; and
• It would be in the best interests of the beneficiaries to terminate the trust.

If such conditions are met, the court can direct:

“the distribution of the trust assets to and among those beneficiaries who at the time are entitled (or entitled in the discretion of the trustee) to the income and/or principal of the trust and those beneficiaries who would be entitled (or entitled in the discretion of the trustee) to the income and/or principal of the trust if it were to terminate immediately before such order or decree. The distribution of the trust assets shall be made in such manner, proportions and shares “as in the judgment of the court will effectuate the intention of the creator.” EPTL § 7-1.19.

Further, if the application of EPTL § 7-1.19 would reduce or eliminate a charitable deduction otherwise available to any person effected by the trust termination, this section would not apply to such trust.

It is imperative that you consider the impact that terminating a trust may have before taking steps towards that goal. If you think that the New York trust you are involved in no longer serves its intended purpose and you would like to see if it can be terminated, the knowledgeable attorneys at Pashman Stein Walder Hayden P.C. can walk you through your options. 

Learn more about our Trust & Estates and Elder Law & Special Needs Planning practices.

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The information contained herein is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to these materials do not create an attorney-client relationship between Pashman Stein Walder Hayden P.C. and/or its attorneys, and the reader of the materials.