There are three circumstances when a trustee has authority to dissolve a living trust. The first is when dissolution is authorised by the terms of the trust document. The second is when a statute authorises the trust to be dissolved. And the third is pursuant to court order, meaning a judge orders dissolution of the trust.
Identify the legal authority for you to dissolve the trust. This could be a provision in the trust itself, a statute authorising dissolution or a court order requiring or allowing dissolution.
Review the trust document for any provisions relating to disposition of property upon dissolution.
Review the trust document for the name of each beneficiary and, if necessary, locate the contact information for each beneficiary.
Distribute the trust property according to the terms of the trust, the applicable dissolution statute and/or the court order of dissolution.
Prepare the necessary documents of conveyance to the appropriate beneficiary if any of the property in the trust requires a certificate of title, such as real property or a car. For example, if you have to distribute real property, you will need a deed to transfer the property from the trust to the beneficiary.
File a final trust tax return with the IRS. The form you need to fill out and file is IRS Form 1041.
Every state has its own set of statutes relating to trusts, so consult your state laws to determine whether you have statutory authority to dissolve a trust and, if so, the manner of distributing the trust assets. Similarly, every trust document is different, so review each trust for instructions on when and how to terminate and dissolve the trust.
If you dissolve a trust without proper legal authority, then you could be legally liable to one or more of the trust beneficiaries. As a trustee, you owe all of the beneficiaries a fiduciary duty to honour the terms of the trust and to care for the trust property. If you ever have any questions about your fiduciary duties, you should consult an attorney and possibly seek judicial guidance on how to proceed.