Smart Trust Termination

Small Trust Termination in Illinois

Video by Attorney Kevin O'Flaherty
Article written by Illinois & Iowa Attorney Kevin O'Flaherty
Updated on
October 28, 2019

In this article, we explain small trust termination in Illinois.   We explain how to terminate a small trust in Illinois and discuss small trust termination by agreement of the beneficiaries and small trust termination by court order.

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 Illinois trusts, see our other article: What is a Trust? | Illinois Trusts Explained.

How to Terminate a Small Trust in Illinois

Difficult economic times can have a negative effect on a trust, causing the trust’s value to significantly decrease or even completely diminish the original purpose of the trust. Trusts often invest in their own assets in forms of cash, bonds, stocks, and real estate, and because these assets are directly related to the present economy, their values can fluctuate. If the values of these assets continue to decrease, the trust earns less money, which means the trust is less likely to be able to pay debts and beneficiaries once it matures. 

A trust becomes too small to administer when the trust pays out more than it earns from investments over time, or when the assets of the trust decrease significantly in value. To terminate a trust and distribute the trust estate without a court order, including principal and accrued and undistributed income, the trustee has to determine that the market value of the trust as less than $100,000 and the costs of continuing the trust will substantially impair the accomplishment of the purpose of the trust.

Small Trust Termination by Agreement of Beneficiaries

In this scenario, Illinois small trust statutes allow a trustee to alter or terminate a trust that has become too insignificant to administer. A trustee is only allowed to terminate the trust if he or she is not acting against the purpose of the trust and all beneficiaries reach a majority consensus. Outside of these circumstances, trustees are typically never allowed to terminate a trust without a court order. 

Once a smaller trust is terminated, remaining trust assets will be distributed to the beneficiaries according to the terms of the trust agreement. The trustee has to give formal notice to the individuals receiving distributions at least 30 days prior to the effective date of the termination. If a particular trustee is an income beneficiary of the trust or is legally obligated to an income beneficiary, that particular trustee cannot participate as a trustee in the termination process. If the trust has one or more co-trustees who are not disqualified from participating in the termination of the trust, the co-trustees may exercise this power. 

Trust Termination by Court Order

In some situations, a trust can be terminated by a court order. The Illinois court may intervene in cases where there was an illegality, impracticality, or the trust has expired. If the beneficiaries wish to modify or terminate a trust without the settlor’s approval, they have to go to court and present their case. A judge evaluates the beneficiaries’ potential interests against the trust, and the court will only allow termination if it furthers the settlor’s initial purpose of the trust.

Trusts may also be terminated in situations where any of the following circumstances apply: 

  • The settlor was not of sound mind at the time of the trust’s creation
  • The settlor created the trust under duress, undue influence, mistake, or fraud
  • The basis of the trust was illegal
  • The trustee is found to be in violation of his or her duties
  • The beneficiaries are experiencing disputes

For example, perhaps a grandparent left a trust to pay for his or her younger grandchild’s college tuition. After the grandparent passes away, the grandchild is diagnosed with a severe illness or disability and cannot attend college. A court order can convert the trust into a special needs trust, because it would be furthering the settlor’s initial purpose of funding the trust. The trust assets are typically distributed as agreed to by the beneficiaries, but the judge does have the power to determine how the trust assets should be distributed. 

If the economy has reduced the value of your trust, or if your trust no longer serves a relevant purpose to your beneficiaries, talk to an attorney. Trust modification or termination may be the best option for you.

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