You have been named as a beneficiary of a Trust, but unfortunately your share of the Trust is not going to be given to you outright. Instead, it must remain locked away in an irrevocable Trust for some time. Some irrevocable Trusts last for several years, or until you reach a certain age, or for your entire lifetime.
Why would any parent give a child an inheritance by locking it away in an irrevocable Trust? There are various reasons why that can occur, some of which are good planning choices and others are misguided. Whatever the reason for the creation of your irrevocable Trust, having money locked away is never easy. For starters, you have to ask the Trustee for distributions—assuming you’re entitled to any distributions. Many Trusts have distribution standards that allow you to get some money. But having to ask your Trustee to make a distribution can be difficult. Especially if the Trustee is one of your siblings.
So why not just terminate the whole thing and get your money outright instead? Believe it or not, terminating an irrevocable Trust, even one set to be locked away for your entire lifetime, is possible. That’s not to say it’s easy. It’s not easy. But it is possible.
Terminating an Irrevocable Trust
There are sections of the California Probate Code (sections 15403, 15404, 15408, and 15409) that provide various bases on which to terminate an otherwise irrevocable Trust. But, those code sections don’t tell the whole story because there is a practical side to terminating Trusts too.
By practical side, we mean the other people who are going to benefit—either now or later—from your Trust. For example, if you are going to receive income from the Trust, but someone else is going to receive the Trust principal after you pass, then you are probably going to have to pay that person something. When someone has a current or future interest in a Trust, they usually want to be paid something for that interest. Moreover, by agreeing to pay something to a future beneficiary, you may be able to buy their cooperation with your plan to terminate the Trust.
The same could be true for the Trustee. Again, if you pay the Trustee a reasonable Trustee’s fee, they may be far more willing to go along with your Trust termination ideas. That’s not to say that you should pay them something unreasonable. But playing nice with the Trustee could go a long way to obtaining your Trust termination.
Doesn’t the Money Belong to Me?
I know what you’re thinking: Why should I have to pay other people to get MY money? Firstly, it’s not your money. When you are the beneficiary of an irrevocable Trust you have effectively been given only a portion of the Trust money. Getting money outright is very different from being given money in a Trust.
For example, if a parent leaves you ten thousand dollars outright, then it becomes yours. You own the money you can spend it however you like. But when you are given ten thousand dollars in an irrevocable Trust, then you really have only been given some of that money. The amount you receive is based on the Trust terms. If the Trust says you are only entitled to income from the money, then your gift may be much smaller than $10,000. Assuming the money generates five percent income per year, that would equal $500 per year. That’s a much smaller gift than $10,000.
In other words, a gift of $10,000 held in an irrevocable Trust is not actually a gift of $10,000 at all. It is a gift of maybe $1,000 to $2,000 at best once you do the math and figure out your share of that money.
And after you pass away, your Trust share is probably going to transfer to the remainder beneficiaries. That means the remainder beneficiaries will get what’s left of the $10,000. They have a valuable interest in your Trust—they just have to wait for it. Moreover, the Trustee is going to get his share of the Trust money too in the form of Trustee’s fees that are paid yearly to manage the Trust fund.
Bottom line: you, the Trustee, and the remainder beneficiaries all have a piece of your Trust funds. You do not own it alone. Therefore, you must deal with these other people if you hope to successfully terminate your Trust. And if you refuse to do that, then the court will do it for you. If you bring a petition in court to terminate an irrevocable Trust, the court may grant your petition, but it will also order that other interested parties must receive a share of your Trust fund.
But it’s not all bad news. With the right legal representation, you can navigate these dangerous waters and end up with a nice Trust termination for your efforts. You just need to be prepared to jump through some hoops and work to negotiate with the other people who have a hand in your piggy bank.