In my last post, I gave a brief overview of the new Kentucky Uniform Trust Code.  I specifically discussed two new provisions in the law, specifically that trusts no longer have to be registered with the court and that a parent can represent his minor or unborn children concerning a trust.

In this post, I will talk about the ability of a court to terminate a trust upon consent of the beneficiaries.

KRS 386B.4-110(2) provides that an irrevocable trust may be terminated if all of the beneficiaries consent to the termination and the court determines that continuation of the trust is not necessary to achieve any material purpose of the trust.

An example may help you see why this new law is so important and what you may want to do about it.

Assume that you create a trust for your children in your Will or Living Trust, and the trust is supposed to last until your child reaches a certain age, like 35.  When you (and your spouse if you are married) are deceased, the trust is set up.  However, your children, who are ages 25, 23 and 19, don’t really understand why you set up a trust for them and what the benefits of the trust may be.  All they want is to get their money.  So they consult an attorney who tells them about this new law.  Each child can then ask the court to terminate his or her trust so long as all beneficiaries agree to the termination and the court determines that there is no material purpose for continuing the trust.

Naturally, getting consent of all beneficiaries and the court may present a challenge to your child, but it may not deter your child from filing a request with the court.  And that request may be granted, especially if the court is not sure about why the trust was created.

However, if you really feel that a trust can serve important purposes until your child reaches a certain age, you can put language in the trust that the court can use to determine whether there is any material purpose for continuing the trust.

For example, if you are creating a trust that lasts until your child becomes 35, you could put some specific language in your trust indicating that you are creating a trust to protect your child’s inheritance from the child’s immaturity or lack of experience.  Then if a court is asked to terminate a trust early, the court will see that you had a specific reason for creating the trust and the court will probably determine that there is still a material purpose for continuing the trust to age 35 and refuse to terminate the trust.

Likewise, if you are creating a longer term trust, such as a lifetime trust, to protect your child’s inheritance in case his or her spouse files for divorce, you can put language in your trust telling the court that it should not terminate the trust early because you are trying to protect the trust funds for your child in case of a divorce.  Since a divorce can happen at any age, the court is likely to determine that there is still a material purpose for continuing the trust and refuse to terminate the trust.

If you want to increase the chances that the trusts you have created for your loved ones will actually work and not be terminated early, you may want to review—and possibly update—the instructions in your Will or Trust to address this new provision in the trust law.