Since the end of 2012, when individuals began seriously contemplating the use of part or all of the $5 million gift tax exemption, many donors have shown interest in “silent” or “quiet” trusts, which are trusts that expressly prohibit the trustees from sharing information about the trust with all or certain beneficiaries.
While they are referred to as “silent,” these trusts will eventually be disclosed to the beneficiaries—notification is merely delayed for some period of time.
While donors may want to make assets available to help their children and grandchildren and take advantage of efficient tax planning opportunities, they often don’t want to tell beneficiaries about substantial trusts for a variety of reasons. Following the substantial increase in the gift tax exemption, this is a more common situation. In 2012, speculation that Congress would reduce the exemption amount caused many families to scramble to use the exemption before year end.
One married couple decided that they wanted to create a trust for the benefit of their children, who were young adults, and their unborn grandchildren in the form of a multi-generational Delaware trust. They have two children: a daughter, age 30, who is starting her own business venture with help from mom and dad, and a son who is in his mid-20s but not yet out of school. In the clients’ view, this was not the time to tell either child about a $10 million trust.
Trust beneficiaries have the right to a substantial amount of information. If there is no contrary direction in the trust, all states require trustees to inform beneficiaries of the existence of the trust and the ongoing administration. Under the Uniform Trust Code (“UTC”), which 31 states have adopted, the trustee must provide a copy of the entire trust instrument upon the request of a beneficiary, as well as information about the trustees, their compensation, the donors and an annual financial statement. The trustees must also provide any information reasonably requested.
In contrast, a silent trust expressly prohibits the trustee from sharing information about the trust, even its existence, with certain beneficiaries. This alleviates the need for uncomfortable conversations and concerns about how beneficiaries will react to newfound wealth.
However, significant drawbacks exist: (1) the trustee’s lack of knowledge of and responsiveness to the needs of the beneficiaries; and (2) the trustee’s lack of accountability in managing the trust.
Without a relationship with the beneficiaries, the trustee has a diminished ability to understand their needs. As the beneficiaries have no knowledge of the trust, there is no way for the trustee to ask about their needs or to know anything about them.
For example, most donors would want the trustee to make a distribution if a child or grandchild were in a serious accident and had limited resources to pay for medical care or living expenses. A trustee of a silent trust, however, is unable to inquire of a beneficiary’s circumstances and has no discretion to make distributions. It is often assumed or directed explicitly that silent trusts make no distributions during the quiet period. Without knowing it, some donors may undermine their own intentions in barring the trustee from notifying beneficiaries.
The most commonly-cited disadvantage is that without knowledge of the trustee’s actions or the existence of the trust itself, the beneficiary has no way to monitor the trustee and protect his interests in the trust. The duty to inform exists so that beneficiaries will have enough information to ensure that the trustee is administering the trust and managing its assets responsibly.
Only certain states permit silent trusts. Several states that have adopted the UTC have not made the duty to inform mandatory, seemingly allowing for silent trusts. However, it is still unclear whether courts will respect silent trusts in many of those states. They have tended to emphasize the public policy need to give beneficiaries enough information to protect their rights. California, North Carolina, Delaware and Vermont courts have all struggled with how well informed beneficiaries must be, if at all.
Delaware statutorily allows silent trusts1 and has not adopted the UTC. Courts in Delaware also tend to prioritize the explicit intent of the donor, and this may provide more comfort for donors creating silent trusts.
In one well-known Delaware case involving a trustee’s duty to inform, the Delaware Supreme Court commented that “[whatever] may have been [the donor’s] intention in this regard, he did not expressly relieve the trustees of the duties which formed the basis for [the beneficiary’s] petition in the Court of Chancery.”2 This observation indicates that Delaware courts are likely to respect silent trusts and keeps with state policy of respecting the terms of governing instruments.3
While silent trusts typically require the trustee to keep the trust terms confidential, they frequently provide a limited avenue for settling the trustee’s accounts on a periodic basis. For example, a silent trust might direct the trustee to provide annual accounts to only certain beneficiaries or to a designated representative. In fact, Delaware’s silent trust statute provides that a “designated representative” may represent the beneficiaries during the silent period, and has authority to bind the beneficiary and initiate a proceeding to protect his or her interests.4
The option to delay notification offers unique advantages and may allow your clients to do proactive estate planning while guarding young adults from premature knowledge of significant wealth. However, clients should clearly understand the limitations and drawbacks of keeping a trust quiet. The advisor must urge clients to consider about how they want the trust used and what event will trigger notification so that the trust can carry out their intentions.
2McNeil v. Bennett, 792 A.2d 190 (Del. Ch. 2001), aff’d in part, rev’d in part sub nom, McNeil v. McNeil, 798 A.2d 503, 509 (Del. 2002).
3E.g. 12 Del. C. § 3303(a) (“Notwithstanding any other provision of this Code or other law, the terms of a governing instrument may expand, restrict, eliminate, or otherwise vary the rights and interests of beneficiaries, including, but not limited to, the right to be informed of the beneficiary’s interest for a period of time… It is the policy of this section to give maximum effect to the principle of freedom of disposition and to the enforceability of governing instruments”).
412 Del. C. § 3303(d).