EARLY TERMINATION OF IRREVOCABLE TRUSTS

By William H. Soskin, Esq.^*

All estate planners realize that a major problem with drafting irrevocable trusts is relying on estate tax laws that may well change. Until recently, however, few drafters felt the need to include provisions in irrevocable trusts to facilitate termination or modification in the event of significant changes in the tax law. The 2001 Tax Act radically changed the analysis.¹ Because of future substantial increases in the applicable credit amount and at least temporary abolition of the estate tax, drafters are now struggling to provide mechanisms for early termination of tax motivated irrevocable trusts.

In California, there are two very different approaches to facilitate early termination. One approach is to utilize existing California Probate Code provisions to terminate trusts. The second approach, which can be used concurrently with the first approach, is to draft provisions in the trust instrument to allow an independent trustee to terminate a TMIT. This article examines: (1) how our clients can take advantage of the California statutes that permit early termination of trusts; and (2) drafting ideas to facilitate the termination of an irrevocable trust by an independent or independent trustee.

I. IDENTIFICATION OF TAX-MOTIVATED IRREVOCABLE TRUSTS