The idea of leaving a significant inheritance to your children or grandchildren may give you pause. Could the promise of wealth make your heirs act financially irresponsible or reckless? Anticipating a cash cushion, will they neglect their education or fail to pursue career ambitions?
You might want to look into a silent trust. It limits the amount of information shared with beneficiaries or, in some cases, keeps the existence of the trust a secret. Silent trusts offer several benefits, but before you establish one, make sure you understand all the potential advantages and pitfalls.
Most states require trustees to keep beneficiaries (at least those who have reached the age of majority) reasonably informed about the existence of trusts as well as their terms and administration. At a minimum, a trustee generally must provide a beneficiary with a copy of the trust agreement and an annual accounting of the trust’s assets and financial activities.
The majority of states allow you to place limits on the information provided to beneficiaries, but rules vary. Some states, for example, allow the trust agreement to waive the trustee’s duty to inform the beneficiaries. Others allow the trust’s settlor (the person establishing the trust) to limit the trustee’s duty by executing a separate waiver document. In some states, a settlor can limit the disclosure of information by appointing a third-party surrogate (a trusted advisor, for example) to receive notifications and other information from the trustee on the beneficiaries’ behalf.
Eventually, beneficiaries must be given information about a trust. Some states require disclosure after a specified time or upon the occurrence of a specified event (such as the beneficiary reaching a certain age). Others allow the settlor to determine when beneficiaries will be informed.
The ability to keep a trust’s terms or existence a secret offers several important benefits. For example, silent trusts may allow you to do the following:
- Keep your financial affairs and estate planning arrangements confidential
- Avoid beneficiary scrutiny of your trustee’s investment and management of trust assets
- Prevent the disclosure of information about your trustee’s management of family business interests
- Protect beneficiaries from becoming targets of fraud, identity theft, or other nefarious schemes
- Reduce disincentives for beneficiaries to behave in a financially responsible manner, pursue higher education and gainful employment, and lead productive lives.
Informing beneficiaries enables them to monitor trustees’ activities and ensure trustees act in the best interests of the beneficiary. A secret trust removes this opportunity. Without anyone policing the trust, the risk of litigation increases. Years or even decades down the road when beneficiaries learn of decisions by a trustee that they believe breach the trustee’s fiduciary duty, they may choose to take legal action. However, some states allow a third-party surrogate to monitor the trust, which mitigates this concern.
Additionally, secret trusts may not discourage irresponsible or destructive behavior. It may be nearly impossible to keep your wealth a secret from your children, so they will likely expect to share that wealth one day, regardless of whether they know about a trust. But failure to explain the details of your estate plan to your children can lead to hurt feelings and disputes when they learn about them years later.
Instead of a secret trust, which may or may not have a positive impact on behavior, families can utilize an incentive trust. Rather than keeping the trust a secret, an incentive trust provides positive reinforcement by informing beneficiaries of the trust’s terms and by conditioning distributions on behaviors you wish to encourage. Examples include obtaining a college or graduate degree, maintaining gainful employment, pursuing worthy volunteer activities, or avoiding alcohol or substance abuse.
Note that an incentive trust that requires beneficiaries to meet certain goals — such as finishing college or maintaining a certain income level — could discourage other, equally worthy, life decisions. Examples include being a stay-at-home parent, performing volunteer work, or starting a nonprofit organization.
One alternative that accommodates these choices is a principle trust. Rather than condition trust distributions on specific behaviors, the trust outlines general principles for distributing funds to beneficiaries who demonstrate responsible behavior. This provides the trustee with broad discretion to apply these principles on a case-by-case basis.
Your unique circumstances, family concerns, and goals will help determine whether a silent trust makes sense — or whether you should consider an incentive, principle, or other type of trust. Discuss your options with a Hantzmon Wiebel estate planning advisor to determine your next step.
© Copyright 2021 Thomson Reuters.
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