How to Dissolve a Trust
By Joanne Hue, Last updated: 2022-04-07 (originally published on 2021-12-15)
English trusts law originally arose out of equity, the means by which a rule-based legal system is able to achieve fairness in individual circumstances. Based on conscience, trust law developed to ensure that the conscience of a person and their actions vested with property on behalf of someone else is regulated.
Trust law has developed since then in both common law and statute law, reflecting the commercial appeal of trusts and requirements for certainty that such trusts entail.
In the following sections, we’ll highlight:
- The definition of trust
- Different types of trust
- The parties involved
- The reasons to dissolve a trust
- The ways in which trust may be dissolved.
What is Trust?
A trust separates legal and beneficial ownership in property between one or more trustees (who hold the legal ownership) and beneficiaries (who hold the beneficial ownership).
If the trust is to be made in a person’s lifetime, to take immediate effect, then it is usually evidenced by a trust deed and often referred to as a settlement. How long a trust will last is entirely at the settlor’s discretion, however, the trust period must be stipulated in the trust document.
It may be just a few years, perhaps during a person’s widowhood, or until a child attains a certain age, or marries. If it is to be created on or shortly after a person’s death, then the trust rules must be set out in his will, known as a Will Trust.
Who are parties in a Trust?
The person who originally owned both the legal and beneficial ownership transfers property (be it shares, land, money or physical property like valuable jewelry) to the trustee to hold on behalf of the beneficiaries, with or without specific instructions on how to keep the property safe or deal with it, and what has to happen before the beneficiaries can have full legal ownership over the property as well.
Trustees, as legal owners of the trust’s property, administer the affairs of the trust in accordance with the trust instrument and law. The trust’s affairs may include investing assets, ensuring trust property is preserved and productive for the beneficiaries, accounting for and reporting to the beneficiaries concerning trust property transactions, taking care of tax requirements for the trust and other duties. Trustees may also have the power to decide when and whether beneficiaries should receive trust assets for their benefit, which assets are concerned and how much they should receive.
Trustees may be natural persons (individuals) or legal entities (such as a company). A person is not just limited to a UK citizen – foreign nationals, relatives or companies (trust corporations) may all be trustees. The minor can’t become a trustee. A trust may have more than one trustee. But a trust will not fail solely for want of a trustee.
Trustees are usually appointed in the trust document, but a court may also appoint, replace, or remove a trustee. The settlor can even appoint himself and his spouse as trustees (if he so wishes) to enable them to remain in control of the assets and decision making.
The beneficiaries hold the beneficial interest in the trust property. The beneficiaries will receive income from the trust property, or they will receive the property itself, according to the terms of the trust. The settlor has a wide discretion when creating the trust, subject to some limitations imposed by law.
A beneficiary is usually a natural person, but can also be a company or charity. A natural person beneficiary can be a minor, or someone with a mental disability (in fact many trusts are created specifically for persons with those legal disadvantages). Trusts can also be for unborn children, although the trusts must vest within the applicable perpetuity period.
Different types of Trust?
There are four main types of trust: express, resulting, constructive and implied.
Express trusts are intentionally created by the settlor. This will involve specifically identified property, clearly identified beneficiaries and terms set out by the settlor. Legal title must also be transferred properly to trustees before the trust can be effective – the manner and form of this transfer depends on the type of property in question.
Resulting trusts are implied by the court in circumstances where the settlor has transferred title to a trustee but failed to identify the beneficiaries, in which case the trust fails, and the beneficial interest will be held by the trustee on resulting trust for the settlor who becomes entitled to the trust assets. A resulting trust may also arise where someone contributes to the purchase price of a property, in circumstances which do not suggest gifting, where a resulting trust will be implied in proportion to the size of the contribution.
Constructive trusts arise where a defendant has acted in a way that is unconscionable and has received or kept property as a result, such that, from the time the act is performed and the person is aware that there is a mistake or dishonesty, the defendant is considered to hold the property on trust, which gives rise to an equitable interest in the property for the rightful owner. Constructive trusts can also arise in the context of family homes.
Implied trusts are less common these days but arise from inferred intention of a settlor by their conduct, language or relationships that they wished to create a trust, even if they did not explicitly state as much.
Why dissolve a trust?
Usually, trusts must be formally wound up and dissolved upon the vesting date. The trust must be dissolved when it reaches the vesting date. However, there may be other circumstances which require a trust to be dissolved before it reaches its vesting date. A few of reasons are given below:
- where the trust is no longer needed (for example, where a family trust was set up between husband and wife and later, they got separated.
- the object and purpose of the trust is achieved (for example, where trust was set up to run a business and later, the business itself was sold)
- the cost of running and maintaining the trust is too high (for example, where based on your personal circumstances, the financial and tax benefits of using a trust are limited and the cost of running and maintaining the trust is too high)
- Where the court orders the trust to be dissolved (for example, if it is ruled that the trust is a sham trust).
How do you dissolve a trust?
Where it is found appropriate to dissolve the trust, there are four options by which the trust may be dissolved. These are discussed below:
Distribution of the entire trust property
The easiest way to dissolve a trust is to have a vesting date. A vesting date is a trust’s official end date. Additionally, it states the details of the termination of the deed. This would involve the trustee distributing the assets to the beneficiaries. When this way is adopted to dissolve the trust, the trustee is required to follow certain steps:
- Determine how to deal with each asset. For instance, an asset could be transferred to a beneficiary or sold with the profit distributed to the beneficiaries.
- Discharge all the liabilities of the deed.
- Prepare trust accounts. Additionally, they must ensure the accounts are independently verified.
On the day, the trustee must formally appoint all of the property to the beneficiaries as per the deed. The trustee should record distributions and the dissolution of the deed.
Revocation by the settlor or trustee
There may be a provision in the trust deed which allows for the trustee or settlor to revoke the deed. However, the trust deed will be binding if there is no such provision contained in the deed. Also, to revoke the deed, the provisions of the deed should specify the exact steps required for the dissolution as it will require paperwork and the preparation. Additionally, beneficiaries must have access to the formal records.
Under the rule in Saunders v Vautier (1841) EWHC Ch J82, beneficiaries that meet specific criteria may consent to terminating a trust early and receive legal title to the property held thereon.
The courts have taken the approach that the rights of the beneficiaries outweigh the intentions of the settlor.
The criteria are that
- The beneficiaries are absolutely entitled to the trust property, which means that they have sole rights to the assets. A person who is absolutely entitled to an asset in a trust also has the exclusive right to direct the trustees on how to deal with it. For example, if there are five beneficiaries, all five beneficiaries together would be considered absolutely entitled to the trust property,
- consent is mutual and unanimous among all beneficiaries, and
- all beneficiaries are adults over 18 with legal capacity (sui juris), so this cannot include those who are not yet over 18, without legal capacity, or do not exist yet. So, if some of the beneficiaries are below 18 or cannot legally give consent, the rule cannot be applied.
The practical effect of the rule in Saunders v Vautier is that if the above three conditions are met, beneficiaries of a trust may call in the property from the trustees, terminate the trust, and distribute the trust property as they wish, without any petition to the court
The court also has the power to order the dissolution of the trust.
Such a process involves legal proceedings.
And that’s a wrap on our intro on how to dissolve a trust. Questions or comments? We’re all ears.