What Happens When a Trust Terminates?

Termination of a trust is like dissolution of a business organization. In both cases, there is a winding up period before the entity legally ceases to exist.

Usually, this means paying any outstanding trust obligations, liquidating assets, filing final income tax returns, preparing a final accounting for the benefit of the beneficiaries, and distributing trust assets to the appropriate beneficiaries.

The Tennessee Trust Code refers a trustee’s duties and powers when a terminating event occurs. One of these is T.C.A. § 35-15-817(b), which states:

Upon the occurrence of an event terminating or partially terminating a trust, the trustee shall proceed expeditiously to distribute the trust property to the persons entitled to it, subject to the right of the trustee to retain a reasonable reserve for the payment of debts, expenses, and taxes.

Note that the trustee is required to “proceed expeditiously.” If the trustee fails to do, the trustee could be liable for breach of trust.

See also T.C.A. § 35-15-816(b)(22), which gives trustees the power to:

On distribution of trust property or the division or termination of a trust, make distributions in divided or undivided interests, allocate particular assets in proportionate or disproportionate shares, value the trust property for those purposes, and adjust for resulting differences in valuation and basis for income tax purposes;

And T.C.A. § 35-15-816(b)(26):

On termination of the trust, exercise the powers appropriate to wind up the administration of the trust and distribute the trust property to the persons entitled to it;

These statutes make clear that distributions follow the termination of a trust and do not occur simultaneously with it. In other words, the trustee holds title to, and remains legally responsible for, trust assets until they are formally distributed. 

Posted by Joel D. Roettger, JD, LLM, EPLS

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