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Friday, January 29, 2021

Silent Trusts

     

Shh!

THIS IS A SILENT TRUST, LET'S KEEP IT QUIET!

Generally, estate planning advisors recommend that you be upfront with family members about how you plan to divide your assets. For example, you might hold a family meeting or write a letter to accompany your will. However, if you’re using a “silent trust,” sometimes referred to as a “quiet trust,” you’ll have keep it to yourself.

A silent trust limits the amount of information shared with beneficiaries or, in some cases, keeps the existence of the trust secret. This trust type offers many benefits, but also a few drawbacks. Let’s take a closer look.

Understanding your options

The duties of a trustee are governed by state law, which varies from state to state. Most states require trustees to keep beneficiaries (at least those who’ve reached the age of majority) reasonably informed about the existence of a trust as well as its terms and administration. Typically, at a minimum, trustees must provide beneficiaries with a copy of the trust agreement and an annual accounting of the trust’s assets and financial activities.

Most states allow you to place limits on the information provided to beneficiaries, but they accomplish this in different ways. Some states, for example, allow the trust agreement to waive the trustee’s duty to inform the beneficiaries. Others allow the trust’s settlor (the person establishing the trust) to limit the trustee’s duty by executing a separate waiver document. In some states, a settlor can limit the disclosure of information by appointing a third-party surrogate (a trusted advisor, for example) to receive notifications and other information from the trustee on the beneficiaries’ behalf.

Eventually, beneficiaries must be given information about a trust. Some states require disclosure after a specified time or upon the occurrence of a specified event (such as the beneficiary reaching a certain age). Others allow the settlor to determine when beneficiaries will be informed.

Silent trust benefits

The ability to keep a trust’s terms or existence a secret offers several important benefits, including:

  • Maintaining confidentiality over the settlor’s financial affairs and estate planning arrangements,
  • Avoiding beneficiary scrutiny of the trustee’s investment and management of trust assets,
  • Preventing the disclosure of information about the trustee’s management of family business interests, and
  • Potentially reducing disincentives for beneficiaries to behave in a financially responsible manner, pursue higher education and gainful employment, and lead a productive life.

A secret trust may also help protect beneficiaries from becoming targets of fraud, identity theft or other nefarious schemes.

Silent trust drawbacks

The most significant drawback of a secret trust is that it defeats one of the key purposes of keeping beneficiaries informed: to enable them to monitor the trustee’s activities and ensure that he or she is acting in their best interests. Without anyone “policing” the trust, there’s an increased risk of litigation years or even decades down the road, when beneficiaries learn of decisions by the trustee that they believe breached the trustee’s fiduciary duty. This may be less of a concern, however, in states that allow a third-party surrogate to monitor the trust.

Another drawback is that secret trusts may not be effective in discouraging irresponsible or destructive behavior. It’s nearly impossible to keep your wealth a secret from your children, so they’ll likely expect to share that wealth one day, regardless of whether they know about a trust. But failure to explain the details of your estate plan to your children could lead to hurt feelings and disputes when they learn about them years later.

Access your situation

With a quiet trust, you keep your beneficiaries’ inheritance a secret and hope that, without the negative influence of future wealth, they’ll behave responsibly. Talk with your estate planning advisor to help determine if a silent trust is right for your particular situation.


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