Terminating Irrevocable Trusts.

June 4, 2020

Terminating Irrevocable Trusts.^{^[1]}

When a trust document describes the trust as an irrevocable trust, can it be revoked? Yes. It can be revoked by the creator of the irrevocable trust, referred as a trustor, settlor or grantor, and all living persons having a vested or contingent interest in the trust, referred to as beneficiaries.^{^[2]} The document revoking the trust should be signed by the trustor and all living persons having a vested or contingent interest in the trust, as well as the trustee of the trust. If one or more of those persons object to terminating the trust, then a court proceeding will be necessary to seek approval of the court to revoke the trust.

In Oklahoma every trust is revocable, unless the trust document expressly states it is irrevocable. The section in the Oklahoma Trust Act addressing this topic provides,

Every trust shall be revocable by the trustor, unless expressly made irrevocable by the terms of the instrument creating the same. Provided, that any trust may be revoked by the trustor upon the written consent of all living persons having vested or contingent interest therein. The term “contingent interest,” as used in this section, shall include an interest which a beneficiary may take by purchase, and exclude any interest which a beneficiary may take by descent. Provided further that this section shall not apply to a spendthrift trust unless same is created by the trustor for his own benefit.^{^[3]}

So the first step in revoking an irrevocable trust is to identify the parties involved. Identifying the trustor is easy. The trustor is the person who creates the trust. Identifying those living persons having vested interests is a bit less so. Living persons having a vested interest in the trust are those living persons having a present right to all or part of the property in the trust, which must include the right to give that right to the property away.^{^[4]} Identifying those living persons who have a contingent interest in the trust and whose consent is necessary is more problematic. With regard to living persons in the contingent interest group, the consent of those persons who “take by purchase”^{^[5]} is necessary but the consent of those persons who “take by descent” is not necessary. An example may illustrate how to determine whose consent is necessary to revoke an irrevocable trust.

Dunnett v. First Nat. Bank & Trust Co.^{^[6]} dealt with a situation in which the trustors and their only son agreed to dissolve an irrevocable trust so son could use funds from the trust to go into business with his father. Unfortunately, the trustee of the irrevocable trust objected to dissolving the trust. Parents and son sued the trustee, asking the court to dissolve the trust. The trust generally provided trustors were to receive income from the trust for their lives and after death of the survivor of trustors, son, at age 45 years, was to receive the corpus and all accrued income from the trust. If son died before the age of 45, the property in the trust was to be paid as he directed in his will, or if he made no will the property in the trust was to be distributed to his “issue.” If son left no will and no surviving issue, one-half of the trust property was to be distributed to his father’s “heirs at law” and one-half to his mother’s “heirs at law.”^{^[7]} “The trial court refused to dissolve the trust, . . ., ” ruling in favor of the trustee.^{^[8]} The appellate court reversed the judgment of the trial court.^{^[9]}

In addition to the consent of the parents and the son, in defending the case the trustee argued the consent of the “heirs at law” of the parents and the consent of the “issue”^{^[10]} of the son were also required in order for the trust to be revoked. Since the “heirs at law” of the parents were unknown at the time of suit and the son had no “issue” at that time, trustee argued the trust could not be terminated.

The appellate court addressed whether the “heirs at law” of the parents and the “issue” of the son had a beneficial interest in the trust, such that their consent to terminate the trust was necessary.^{^[11]} Regarding the term in the trust providing the parents’ “heirs at law” might receive property from the trust, the appellate court concluded use of “heirs at law” meant those unknown persons would take by the laws of descent from the parents, and thus their consent to terminate the trust was not necessary.^{^[12]} Regarding the term in the trust providing son’s “issue” might receive property from the trust, the appellate court concluded consent of the “issue” was not necessary because son had no issue at the time of the suit,^{^[13]} and because the intent of the trustors in creating the trust was to benefit their son, and not benefit his “issue.”^{^[14]} The appellate court concluded the consent of the parents and son were the only consents needed to revoke the irrevocable trust.

An irrevocable trust is not written in stone. It can be revoked or terminated if the requirements of the law discussed above are satisfied.

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^{^[1]}This article only discusses terminating an irrevocable trust under Oklahoma law. Further it does not address possible tax ramifications if an irrevocable trust is terminated.

^{^[2]}The creator of the trust may or may not also be a beneficiary.

^{^[3]}Okla. Stat. tit. 60, § 175.41.

^{^[4]}A vested interest is “[a]n interest for which the right to its enjoyment, either present or future, is not subject to the happening of a condition precedent.” Black’s Law Dictionary, p. 886 (9^th Ed. 2009).

^{^[5]}As with many things in the law, the word “purchase” in this context has nothing to do with buying an interest in the trust. In this context it means transferring property in a manner other than by the laws of descent. Black’s Law Dictionary, p. 1399 (revised 4^th Ed. 1968).

^{^[6]}1938 OK 608, 85 P.2d 281.

^{^[7]}1938 OK 608 at ¶¶ 1-2, 85 P.2d at 282.

^{^[8]}1938 OK 608 at ¶ 1, 85 P.2d at 282.

^{^[9]}1938 OK 608 at ¶ 26, 85 P.2d at 286.

^{^[10]}“Under Oklahoma law, ‘issue’ means descendants, lineal descendants, offspring, and grandchildren, . . . .” Hughes v. Fidelity Bank, N.A., 1982 OK 45, ¶ 5, 645 P.2d 492, 494-495.

^{^[11]}1938 OK 608 at ¶ 4, 85 P.2d at 282.

^{^[12]}1938 OK 608 at ¶¶ 9, 10, 12, 85 P.2d at 283.

^{^[13]}“[O]nly the consent of persons in being is required for revocation of a trust under the rule that by mutual consent the settlor and all persons beneficially interested in a trust may revoke the same.” 1938 OK 608 at ¶ 23, 85 P.2d at 285 (emphasis added).

^{^[14]}1938 OK 608 at ¶ 24, 85 P.2d at 285-286.