How to Keep a Trust “Silent”
One frequent concern for families when it comes to estate planning comes with the idea of transferring wealth to younger generations, mostly because they are concerned about the ability of those young people to be able to handle the wealth they will one day inherit. As a result, according to several studies, fewer than one-third of wealthy parents have fully disclosed their wealth to their children.
Their perception that their children aren't prepared to handle the wealth is one of the most-cited non-tax reasons why families often establish what are often extremely large trusts, especially now that estate and gift-transfer tax exemptions are up to $5.43 million for individuals and $10.86 million for married couple.
While historically trustees have always provided beneficiaries with information regarding trust assets, performance, distributions and taxes, and indeed, most states require the dissemination of that information, there is a recent trend in many states to enact statutes allowing beneficiary quiet trusts.
These types of beneficiary quiet trust statutes generally give the settlor a little more flexibility when it comes to waiving beneficiary notice of trust assets and to keep trust information silent from one or more beneficiaries. Specific statutory language should be included in the trust instrument demonstrating the intent to withhold information from one or more beneficiaries, as well as an explanation that such silence is in the best interest of the beneficiaries. That way, the trustee is protected from accusations of disloyalty or bad faith.
While a trust document typically includes provisions identifying the settlor, trust protector and/or advisors, as well as the ability to expand, restrict, eliminate or modify and the rights of beneficiaries to receive trust information. A quiet beneficiary trust document should also include a provision explaining that the Trustee is not required to provide certain notice to qualified beneficiaries.
A parent or grandparent may have a really good reason or reasons for keeping trust information silent as to children, grandchildren or great-grandchildren. Sometimes, they want to encourage fiscal and social responsibility with that person, which may be undermined if they know about a large trust. In some cases, settlors worry that knowledge can lead to guilt, anger or shame for a beneficiary if disclosed.
Another important reason many decide to keep a trust quiet has to do with wealth preservation and asset protection, because with many beneficiaries, the less they know about a trust or inheritance, the less the incentive on the part of others to exploit them, or even kidnap them, and it also lessens the potential damage due to such issues as emotional, psychological or drug problems, or even bad marriages and creditor problems. Often, not knowing about the trust protects them and the assets.
Keep in mind, for a settlor to take advantage of a beneficiary quiet trust, the trust will have to be properly sitused and administered in a state with a beneficiary quiet statute. That does not mean they have to be in one of these states, but if they set up a trust in another state, they should also consider asset protection and state tax laws in that state before they do so.