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Silent Trusts: An Estate Planning Tool to Protect a Trust from Beneficiaries

Silent Trusts: An Estate Planning Tool to Protect a Trust from Beneficiaries

Silent trusts are a tool in estate planning that the wealthy use to keep the trust “silent” from beneficiaries. Traditional trusts provide information to the beneficiary about the assets, taxes, distributions and performance of a trust.

The trustee has an obligation to inform the trustee of this information in most states.

Understanding a Silent Trust

Family meeting for silent trust

The wealthy often don’t disclose their full wealth to their children. This can help to alleviate entitlement issues, and it’s a matter of privacy that parents invoke. A silent trust can keep the size and assets of a trust hidden from the beneficiary.

In effect, the beneficiary notice can be waived under a silent trust.

Trusts may have several beneficiaries, and a silent trust can be setup in such a way that one of the beneficiaries isn’t allowed to be told about the size of the trust. A trust protector will work with these beneficiaries to ensure the trust’s true extent is not revealed.

Discretionary Trusts

A discretionary trust can be formed, which allows trust protectors to use their own discretion as to when beneficiaries will receive information and what information they’ll receive. This form of a trust may be invoked.

The Purpose of a Silent Trust

A silent trust is often meant to protect a trust’s assets from a beneficiary. This is done to promote responsibility. A good example of this would be revealing a $10 million trust to a beneficiary that is 18 years old.

The individual’s life would change drastically from the trust.

The beneficiary may:

  • Choose not to go to college
  • Spend beyond their means
  • Not learn financial or social responsibility

The goal is to not let the trust influence the beneficiary in a negative way. Young beneficiaries may not appreciate wealth or know how to handle money properly. A trust’s creator can also add provisions into the trust to ensure that the beneficiary has met certain obligations before being granted their windfall.

These provisions can include:

  • Finishing higher education
  • Starting a career
  • Getting married

The provisions are milestones in which money will be dispersed in most circumstances. Disbursements can be a full payout or a partial payout with further payouts contingent on further provisions.

There is also a basis of a silent trust protecting the beneficiary from potential lawsuits. A beneficiary that doesn’t know the full extent of his or her trust will be better able to protect themselves from lawsuits.

The beneficiary can’t disclose wealth and assets they don’t know about to friends or others that may bring up a lawsuit against the purpose due to their windfall.

Tax reports will not have an impact on a quiet trust’s access. Tax information will not need to be disclosed to the beneficiary.

Issues with Silent Trusts

Silent trusts are harder to maintain for the trustee. Trustees don’t like administering a silent trust for many years, as it can be tedious to keep information pertaining to the trust a secret. Many trustees would rather administer the trust in close relation with the beneficiary to ensure that the trust is used in the manner the grantor wished.

Consideration must also be given to silent trusts where one or more beneficiaries are given information about the trust.

When one beneficiary is told information about a trust, it’s often difficult to keep the information quiet from other beneficiaries. This leads to the reasoning behind the trust being mute.

Trustees that are required to administer a silent trust often have less interaction with beneficiaries because of their duty to keep the trust’s assets silent.

It’s easier to avoid letting the secret out when interactions are limited.

New Jersey recently enacted the Uniform Trust Code on July 17, 2017. The enactment, which has been enforced in 30 states, ensures that the administration of trusts will occur similarly across state lines.

Trustees and beneficiaries benefit from the enactment.

Under the law, a beneficiary can receive a copy of the trust instrument. This is a request for information by the beneficiary.

Specific terms can be placed in a trust to protect the foundation of a silent trust.

The only change, which is of importance, is that a beneficiary that is at least 35 years of age can request information about the trust and a copy of the instrument. It’s the responsibility of the trustee to furnish this information on request in this case.

The beneficiary must be “qualified” to be able to receive this information.

“Qualified” as stated by the Estate Planning Council of Northern New Jersey, means a beneficiary who, on the date the beneficiary’s qualification, is determined:

  • is a distributee or permissible distributee of trust income or principal;
  • would be a distributee or permissible distributee of trust income or principal if the interests of the distributees described in paragraph (1) terminated on that date; or
  • would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date.

The Micklin Law Group, LLC is a New Jersey law firm focusing on family law. Attorney Brad Micklin was recently named to The National Advocates list of Top 100 attorneys from each state. Brad has experience working with estate planning. You can read more on this topic by visiting our divorce blog. To set up a consultation, call 973-562-0100.

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