Whether in the context of a Kennedy-scale fortune or a more modest asset protection plan, trusts must eventually come to an end. This article explores the various circumstances under which a trust may conclude, including a brief discussion on the Rule Against Perpetuities.

Types of Trusts

A trust is a legal arrangement wherein a trustee holds and manages assets for the benefit of beneficiaries. Trusts can take many forms, including revocable trusts, irrevocable trusts, and charitable trusts. Each type carries unique features and serves different purposes. Charitable trusts, for example, specifically benefit charitable organizations or causes.

More: What is a Charitable Trust?

When a Trust Ends by Design

In general, a trust concludes when its terms have been satisfied. For instance, if a trust was created to last until a beneficiary reaches the age of 25, the trust terminates once that condition is met. Some trusts are designed to distribute assets at certain intervals until the trust is depleted.

When a Trust Ends due to Purpose Fulfilled

Trusts also end when their established purpose has been achieved or can no longer be fulfilled. If a trust was set up to fund a child's college tuition, and the child receives a full scholarship or there’s money left over after graduation, the trust can then be terminated. Trusts effectively conclude when all the assets have been distributed to the beneficiaries. Additionally, revocable trusts can be dissolved at any time by the person who established the trust.

When a Trust Ends via Court Order or Low Assets

In rare cases, a court may order a trust to be terminated. This usually happens when all beneficiaries agree, and the termination doesn't disrupt the primary purpose of the trust. Trusts can also end if the asset value held within the trust is considered uneconomically low. In California, this is when the trust principal is worth $20,000 or less.

Read more: What Accounts Should be in Trust, How to Title them, & FDIC Insurance

The Rule Against Perpetuities

The Rule Against Perpetuities is a legal principle ensuring that a trust doesn't last indefinitely. In California, it stipulates that a trust must end no more than 21 years after the death of an identifiable person alive when the trust was created.

Example 1: Property Preservation Trust

Consider a wealthy property owner who wants to establish a trust to preserve a historical property for future generations. The owner might set up a trust, stating that the property is to be maintained by the beneficiary (their son) during his lifetime, and then passed on to the son's descendants, with each subsequent generation becoming the new beneficiary.

This arrangement, however, falls afoul of the Rule Against Perpetuities. According to the rule, a trust must end no more than 21 years after the death of an identifiable person alive when the trust was created. In this scenario, let's say the son lives for another 40 years, and his oldest child (the property owner's grandchild) lives for an additional 50 years. If the grandchild has a child just before his death, the trust will potentially continue for over 90 years after the son's death—well beyond the 21-year limit established by the Rule Against Perpetuities.

To avoid violating the rule, the property owner could revise the terms of the trust, specifying that the property is to be held for the son's lifetime, then passed on to the son's descendants, but the trust must conclude within 21 years of the son's death.

Example 2: Education Trust

Imagine a grandparent who sets up a trust to provide for their grandchild's education. The terms of the trust stipulate that the assets are to be used for the grandchild's education expenses until the grandchild completes their education or reaches the age of 25, whichever comes later. However, the trust also stipulates that if the grandchild does not use all of the trust's assets by the age of 25, the remaining assets should be held in the trust for the education of the grandchild's future children.

This scenario may violate the Rule Against Perpetuities. The trust could potentially continue indefinitely, as it is contingent on the birth of the grandchild's future children, an event that could occur more than 21 years after the grandchild's death. To avoid this issue, the terms of the trust could be adjusted to ensure that the trust will terminate no more than 21 years after the death of the grandchild, thereby aligning with the Rule Against Perpetuities.

Closing Thoughts

Navigating the complexities of trust law, including understanding when and how a trust can end, requires specialized knowledge. Consulting with a knowledgeable estate planning attorney can help ensure a trust accomplishes its intended purpose.

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