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.