Terminating Trust to Reduce Taxes Owed Not Allowed

April 10, 2024 | Jennifer Harrington

On March 27th, 2024, the Iowa Court of Appeals affirmed the district court’s ruling that a trust could not be terminated. The beneficiaries of the trust had petitioned the court for termination, arguing there were significant negative tax consequences that could be avoided by early termination since a large portion of the principal was the grantor’s Individual Retirement Account (IRA). Although the court acknowledged the negative tax consequences, it ultimately found that the material purposes of incentivizing education and continuing income to a particular beneficiary until their retirement required the continuation of the trust.


Jeanne Winn established a revocable trust prior in 2015 and placed her Individual Retirement Account (IRA) into the trust. She died in 2020. Upon her death, the trust directed her daughter, Jennifer, would receive “the allowable minimum distribution” of the IRA if greater than 3% or 3% of the trust’s principal annually. The trustee also had the discretion to distribute principal for Jennifer’s “health, maintenance, and education” and to Jeanne’s granddaughters for “health and education.” Upon completing a four year degree, each granddaughter would receive $50,000 from the trust.  After twenty years, the trust would distribute the remaining principal to the three beneficiaries. There was no spendthrift clause. Jeanne’s brother was the successor trustee.

In 2022, all three beneficiaries petitioned to terminate the trust. The primary reason for termination was the beneficiaries would ultimately receive less money if the trust terminated later due to tax treatment of the IRA within the trust. The beneficiaries presented expert testimony stating that the net distribution to the beneficiaries could be hundreds of thousands of dollars less if the trust continued.  

The trustee opposed the termination. He testified that Jeanne worried Jennifer would “blow the money” if given a lump sum distribution, and that distribution now would conflict with Jeanne’s wishes as he understood them. Additionally, Jeanne’s former financial advisor testified that they advised Jeanne that placing the IRA was not the most tax efficient, but that Jeanne was not concerned about the tax consequences.

The district court found the continuation of the trust was necessary for two reasons: (1) to incentivize the granddaughter’s education efforts and (2) to prevent Jennifer from receiving a lump sum. The beneficiaries appealed the district court’s decision.


The court of appeals began its opinion by examining  the Iowa Trust Code found in Chapter 633A. The court noted Iowa Code § 633A.2203(1) allows for trust termination when all beneficiaries agree and continuing the trust “is not necessary to carry out a material purpose.” However, subsection (5) of the same statute recognizes that asset protection is presumed to be a material purpose of a trust containing “a provision giving the trustee discretion to distribute income or principal to a beneficiary or among beneficiaries.” The court then found that continuing the trust was necessary to fulfill the trust’s material purposes of asset protection for Jennifer and incentivizing the granddaughters’ education.

Finally, the court addressed the tax consequences of continuing the trust. The court assumed, but did not decide, that the math produced by the beneficiaries showing hundreds of thousands of dollars saved in taxes if the trust were terminated was correct. Even so, “the purpose of the trust was not to maximize the tax ramifications of the payout[.]” Jeanne had other wishes and the financial advisor’s testimony showed she was aware of the tax disadvantages, yet chose to place the IRA in the trust anyway. The court stated that it could not second-guess Jeanne’s intent in forming the trust. The fact that the court or the beneficiaries might make “different financial decisions based on tax consequences” was “not a legal basis for termination.”