Can you dissolve a Trust?

Sometimes clients ask us: Can you dissolve a Trust? The straightforward answer to that is yes, but there are several caveats around that.

The reality is the first question needs to be:

Why would you want to dissolve a Trust?

Sometimes Trusts come to a natural end, so there is no need to dissolve them. This happens if the beneficiaries become fully entitled to the capital and income in the Trust, or the last beneficiary named dies. The Trust may also have naturally come to the end of the term specified – for example, if the beneficiaries have reached a certain age. All Trusts created after 5 April 2010 have a maximum term of 125 years – although, clearly, we are a long way off that yet!

If the reason for wishing to dissolve the Trust is to access funds, there is more than one way to achieve this.

If you choose to dissolve the Trust and receive all the money held this means that the money would go into your estate and may be liable to inheritance tax. Ordinarily, this is not something we would recommend.

The more tax efficient alternative, and arguably providing you with more protection, is to approach the Trustees and ask them to issue you with a loan note.

This will entitle you to borrow money from the Trust, which you may or may not need to pay back. It is also up to the Trustees if you are required to pay interest on the amount borrowed.  We have written about Trust loans in more detail here: How loans in Trusts work.

You will need to explain why you require the money, but it is up to the Trustees to decide if you are allowed to access the money.

This leads us neatly on to Trustees.

If you wish to dissolve a Trust because you want to remove one of the Trustees, it is possible to change a Trustee.

Providing there is more than two Trustees, if a Trustee dies, there is no requirement to replace them. If a Trustee retires, then the remaining Trustees can appoint a replacement, but are not legally required to do so.

Should a Trustee become incapacitated then the remaining Trustees can appoint a replacement. If there is only one Trustee remaining it may be necessary to seek approval from the Court of Protection.

It is also possible to dissolve the Trust if all the beneficiaries have reached the age of 18 and wish to access the capital and income, even if the Trustees do not agree. However, again, this is a complicated area, so we suggest you do not do this without legal advice. And, again, there are also inheritance tax implications to consider.

In most instances, there is no need to dissolve a Trust. It will come to a natural end, or the beneficiaries can access funds if they require them.

If you would like more advice on dissolving a Trust, or accessing Trust funds, please contact us on 01344 875 310.

can you dissolve a Trust?