In this series of blog posts, we are exploring the various statutory mechanisms by which an irrevocable trust may be modified or terminated. As previously discussed, a grantor may wish to create an irrevocable trust for any number of reasons, but if circumstances change over time, the provisions of an irrevocable trust may no longer be practical or economical. The administration of a trust comes with inherent and routine costs. When the value of property held in an irrevocable trust no longer justifies the administrative cost, the Virginia Code provides trustees with the ability to terminate the trust, and distribute trust assets outright.
Virginia Code § 64.2-732 provides the framework for termination of an uneconomic irrevocable trust. Pursuant to 64.2-732(a), after notice to qualified beneficiaries, the trustee of a trust with a total value of less than $100,000 may terminate the trust if the trustee concludes that the value of the trust property is insufficient to justify the cost of administration. As an alternative, and under 64.2-732(b), the court may modify or terminate a trust or remove and replace a trustee if the value of the trust property does not justify the expense of administration.
In practice, subsection (a) of 64.2-732 may be most attractive to trustees seeking to terminate an irrevocable trust because it does not require court intervention. In the event of termination, a trustee is required to distribute the trust property in a manner consistent with the purposes of the trust. Because there may be disagreement among the beneficiaries once they’ve received notice, however, or perhaps because there are questions regarding a distribution scheme once a trust is terminated, a trustee is wise to speak to counsel prior to taking action under this provision of the Virginia Code.