What Happens When a Trust No Longer Has Assets?

If the trust's purpose is to give property to your heirs without going through probate, that makes things pretty simple. After you die, an alternative trustee steps in and carries out the guidelines you wrote in the declaration of trust. She takes the assets that the trust controls and transfers ownership to the beneficiaries until the trust is empty. Once the last assets are gone, the trust has done its job and it dissolves.

When you set up a revocable living trust, you reserve the right to take property right back out of it. You can do this because your financial situation or your plans for your property have changed or just because managing the trust is more work than you want. If you take back the assets and you're not planning to put more in, you can use your authority as the trust creator to revoke it completely, wiping it out of existence.

As the name suggests, irrevocable trusts are set up to be hard to change. It's not impossible, however. One of the grounds for changing or terminating the trust is if it runs out of assets or the asset value drops to the point that it costs too much to administer the trust. State law spells out how to change or shut down the trust. In Florida, for example, the trustee can terminate an "uneconomic" trust with less than $50,000 in it and distribute the assets to the beneficiaries.

When you write the declaration that creates the trust, you can include instructions for terminating it. For example, you can authorize the trustee to distribute all the assets to your son when he turns 21 or to give them to charity if your son dies before then. Once the terminating event occurs, the trustee empties out the trust except for a reserve to pay any remaining bills or taxes. After the reserve is gone or given to the beneficiary, the trust dissolves.