When creating an estate plan, many clients fear one or more beneficiaries (often a child) may not make wise decisions in managing their inheritance. It is critical for a parent of a young child to model responsible financial management for the child so he or she will eventually acquire the discipline needed to administer financial assets. However, parents who are reluctant to bequeath assets outright can address their concerns by establishing a restrictive trust for the child, with a trustee who is likely to make sound financial decisions in the best interest of the child.
A trust may provide the trustee with complete discretion to distribute trust income and principal to the beneficiary, or restrict distributions to purposes such as health, education, maintenance and support or very specific reasons such as undergraduate college, purchase of first home, or to pay for a wedding. It is recommended that the trustee also be given the discretion not to make distributions to a beneficiary who is at risk of spending assets for inappropriate purposes (i.e., expensive jewelry or cars, drugs, cults, gambling).
Some clients wish to further limit the beneficiary’s access to trust funds by preventing the beneficiary from becoming aware that the trust exists. Creating a “silent trust” may be an appropriate solution in cases where:
- The beneficiary is too young to appreciate financial planning
- The beneficiary has a history of spending funds frivolously
- The client believes the beneficiary will not seek to become self-supporting if he/she knows the trust exists
- The client has multiple children and wishes to provide for them differently
- The trust holds family business interests that the Settlor wishes to keep confidential
Most states have statutes mandating some kind of trustee accounting to a trust beneficiary. Massachusetts, for example, requires a trustee to keep the beneficiaries of the trust reasonably informed about the administration of the trust and to promptly respond to a beneficiary’s request for information related to the trust.
However, Alaska, Delaware, New Hampshire, South Dakota, Nevada, Tennessee and Wyoming currently have more liberal provisions (or lack of provisions) regarding accounting. Non-residents may establish silent trusts in these states, provided there is an in-state trustee. Clients who do not have trusted family members or advisors local to the state may use a trust company to serve as in-state trustee. Factors such as state income tax, flexibility for administering the trust, and others should be considered when choosing a state in which to establish a silent trust.
Is a Silent Trust an Appropriate Option?
It is rare that a trust beneficiary may be kept in the dark about the existence of the trust forever, and a silent trust may provide for disclosure of the trust at a certain age or upon a certain event (i.e. the death of the Settlor).
Before deciding if a silent trust is appropriate for your beneficiary, you should be aware that such trusts often lack direct accountability, as a trust beneficiary typically has the greatest incentive to review the activity of the Trustee and has the option to bring a lawsuit against the trustee for mismanagement. By the time the beneficiary is aware of the trust, it may be too late to appropriately remedy a trustee’s malfeasance. This concern may be alleviated in some cases by naming another individual (sometimes called a “designated representative”) you trust to receive trust information and to have the power to remove and replace the trustee.
Silent trusts may also have an unexpectedly adverse effect on a beneficiary; the beneficiary may make critical life decisions on the assumption that he/she does not have funds available such as going without health insurance or health care, taking out a high-interest mortgage to buy a modest home, or foregoing education or training likely to increase his or her earning potential and quality of life.
Experienced estate planning counsel can help you determine whether a silent trust is appropriate for you and which state’s trust laws would work best for your situation in establishing a silent trust.
Learn more about our estate planning services at Wilchins Cosentino & Novins. Our attorneys in the Private Clients Services practice welcome the opportunity to assist you with legal and tax planning to transfer wealth to future generations.
Please contact us to learn more about silent trusts as part of discussing your goals and objectives for preserving wealth and protecting assets.
This article is not legal advice and should not be taken as such or relied upon as legal advice nor does it create, and or be construed as creating, an attorney-client relationship.