John, Jr. is the sole beneficiary of an irrevocable trust established as a testamentary trust in accordance with his father’s will. The purposes of the trust were to avoid estate tax, to provide for John, Jr. during his lifetime and provide for John, Jr.’s descendants following his death. John, Jr. and his wife are 65 years old. They have no children and do not plan to adopt any. John, Jr. is frustrated because he is not free to use the property in the trust as he wishes. Furthermore, he resents the expense of administration of the trust. Can the irrevocable trust be terminated?
Fortunately for John, Jr., the Texas Trust Code §112.054 allows for the modification or termination of an irrevocable trust under certain circumstances. Either John, Jr. or the trustee of the trust can bring an action in court to terminate the trust, if one or more of the following exists: 1) the purposes of the trust have been fulfilled, have become illegal or impossible to fulfill; (2) based upon circumstances not known to or anticipated by the creator of the trust, terminating the trust will further the purposes of the trust; (3) modification of administrative, non-dispositive terms of the trust is necessary or appropriate to prevent waste or impairment of the trust’s administration; (4) the order of modification or termination is necessary or appropriate to achieve the creator of the trust’s tax objectives or to qualify a distributee for governmental benefits and is not contrary to the trust creator’s intentions; or (5) if all beneficiaries to the trust agree, continuance of the trust is not necessary to achieve any material purpose of the trust or the modification or termination is not inconsistent with a material purpose of the trust.
The irrevocable trust to which John, Jr. is a beneficiary was created when the estate tax exemption was less than a million dollars. The property in the trust is worth approximately $5 million dollars. In 2019, the estate tax exemption for John, Jr. alone is in excess of $11 million dollars and, when combined with his wife’s exemption, climbs to over $22 million. Therefore, the tax reason for a trust no longer exists.
John, Jr. has no descendants and is virtually certain not to have future descendants. Therefore, the provision providing for descendants as a purpose for the trust no longer exists.
If John, Jr., wishes, he should be able to have the trust terminated. However, before proceeding, he should discuss with a certified public accountant or a lawyer versed in tax matters any potential income tax issues that might arise.
Sandra W. Reed is an attorney with Katten & Benson, an Elder Law firm in Fort Worth. She lives in beautiful Somervell County, near Chalk Mountain.