Alexander A. Bove Jr. and Melissa Langa, BridgeTower Media Newswires
With the huge increase in personal net worth together with a higher awareness of prudent financial planning, more and more families are creating and funding trusts for the benefit of their children and grandchildren.
While this makes a great deal of sense from the standpoint of the financial security of the beneficiary and protection against immature decisions and even lawsuits, it also has the potential of dampening the beneficiary’s drive to succeed and could even encourage the beneficiary to incur debt, knowing the trust will pay it.
A beneficiary’s knowledge, for example, that at age 21 or 25 she will have access to her $1 million trust fund takes away the pressure to remain gainfully employed or excel in school and instead could encourage a career in surfing.
In a real life illustration of such concern, a British (Jersey) court recently approved a request not to tell a 19-year-old beneficiary that he would soon have access to a trust containing almost $100 million.
In agreeing that it made sense to keep the trust “secret” for a while longer, the court noted that learning of the huge amount coming to him might have “catastrophic” effects on the beneficiary. “He might lose enthusiasm for school or university, and might never be inclined to seek employment, instead devoting himself to a life of party-going and riotous living, perhaps ending in addiction to alcohol or drugs.”
When a trust is created for a person, basic trust law, as well as the law in virtually all states (including Massachusetts) requires the trustee to notify the beneficiary of the existence of the trust and all the relevant details shortly after the trust is established (if irrevocable). The trustee is also required to report to the beneficiary on a regular basis (typically annually) thereafter.
Recognizing the foregoing concern when a minor beneficiary is involved, however, a number of states have passed laws allowing the creator of the trust to dispense with such notice and periodic reports until the beneficiary reaches a certain age, such as 21 or 25 (the latest age permitted).
Meanwhile, the beneficiary would have no knowledge of the trust or the amount in it. Such an arrangement is often referred to as a “secret trust,” a “quiet trust” or a “silent trust.”
Massachusetts does not have a law specifically authorizing silent trusts. Unless altered by the terms of the trust instrument, the Massachusetts Uniform Trust Code at section 813(b) requires the trustee to provide qualified beneficiaries with certain information relevant to the trust within the later of 30 days of acceptance of the trust or the date the trust becomes irrevocable.
Perhaps that wouldn’t be a problem when minor beneficiaries are involved; the trustee could invoke the “virtual representation” provisions of MUTC section 303, which permits a parent to represent a minor on most questions and to bind that person in disputes.
But those beneficiaries — say, 18 or older — who are told of the trust and what’s in it might begin to imagine what they would do with all that money. And even though distributions from such trusts are normally discretionary with the trustee, troublesome beneficiaries can still cost the trust time and expense without good cause — and there remains that pile of money in sight of the beneficiary.
Massachusetts settlors who wish to have a completely silent trust, and trustees who want the comfort of a statutory basis to administer them, however, are not without options. They could simply choose to establish a trust in a state that permits such trusts, such as Delaware, Ohio, South Dakota, Tennessee or New Hampshire.
Many of these states allow the settlor to direct that no information regarding the trust be given to the beneficiary until she reaches age 21 (for New Hampshire trusts) or age 25 (for South Dakota trusts).
Depending on the settlor’s wishes, a New Hampshire silent trust could be established, and when the beneficiary reaches age 21, the trust could be moved to Massachusetts.
In Delaware, there is no limit to the length of the “silent period,” and the trust instrument can tie the silent period to the age of a beneficiary, the death of a settlor, a particular date, or the occurrence of a specific event. During the silent period, a “designated representative” serves as a presumed fiduciary to bind the beneficiary in a non-judicial or judicial proceeding, or to institute a proceeding on the beneficiary’s behalf.
It is important to keep in mind that the silent trust is still a trust, and except for the non-disclosure feature, the trustee still has the same duties of loyalty, impartiality and diligence. The beneficiary still has the same rights of recourse for a trustee’s breach of fiduciary duty, except that barring emergency action that could be carried out by a surrogate, the enforcement of such rights by the beneficiary would be postponed until the end of the silent period.
It must also be remembered that the trustee is still charged with administering the trust for the benefit of the beneficiary. That includes not only investing the trust fund but making discretionary distribution to or for the beneficiary’s benefit.
The only difference here is that if and when the beneficiary receives a distribution, the beneficiary may not ask: “Is there more where that came from?” (Well, she can ask, but she won’t get an answer.)
If there are distributions from the trust, there would likely be tax reporting by the beneficiary, and the trustee would provide any necessary reporting information, but none of that would reveal any meaningful information about the trust.
Due to the restrictive nature of a beneficiary’s rights in the silent trust, we believe it would be wise for drafters to provide for the appointment of a trust protector with powers that would add flexibility to the arrangement. Such powers might include, for example, the power to amend the trust, change trust situs or accelerate distribution.
Further, the protector or another party (such as the Delaware designated representative) may be given the right to review and approve the trustee’s accounts while the beneficiary is kept in the dark.
Once the beneficiary reaches the prescribed age, or some other triggering event occurs, she would have the right to review all of the trustee’s actions and accounts over the years, including the silent period.
Thus, some advisors recommend appointing a third party in the trust instrument — like the protector — who can review and approve the trustee’s accounts on an ongoing annual basis to provide some closure for the trustee.
The silent trust is not for everyone, and it must fit the particular needs of a certain client. Some might, in fact, consider it harmful and would prefer the next generation to be actively engaged in learning the responsibilities of wealth from an early age rather than be shielded from the reality of their future.
While opinions can differ, we can all agree that when discovering the goals of our clients, silence is never golden.
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Alexander A. Bove Jr. and Melissa Langa are shareholders at Bove & Langa in Boston, where they concentrate in domestic and international trust and estate law.
