For clients with great wealth - and children - silence can indeed be golden.
Which is why wealth managers should consider, when appropriate, recommending silent trusts, which prohibits the trustee from sharing information about the trust with certain beneficiaries, or even informing beneficiaries that the trust exists in the first place.
Consider, for example, a wealthy client with an adult child going through a divorce. The client may have good reason to keep the existence of the trust confidential until the son’s divorce is final.
Clients with a trust for their grandchildren may also be surprised to learn that by law in many states, their grandchildren must be told about their trust when they reached 18 years of age. Many wealthy clients want to avoid giving the grandchildren too much knowledge about the family’s wealth until they become established in their professional lives.
Other wealthy clients may want to establish trusts for children who are young adults, but still in school or just starting a business. These clients may believe strongly that this is not the time to tell their children about a $10 million trust.
The information trustees are required to provide to trust beneficiaries is complex, and it varies from state to state. Unless there are specific instructions otherwise, trustees typically must inform beneficiaries of the existence of a trust and provide information on its ongoing administration.
Beneficiaries have the right to a significant amount of information. Under the Uniform Trust Code, which many states have adopted, the trustee must provide a copy of the entire trust instrument upon request, as well as information about the trustees, their compensation, the donors and an annual financial statement.
A silent trust is specifically intended to do the exact opposite. It is created in order to preserve and manage wealth, while keeping it a secret from the people who will one day benefit from it.
Whether a trust can be silent depends on the state law that governs the trust: several states mandate disclosure when a beneficiary reaches age 25. Silent trusts are being reviewed by courts in other states; in general, courts tend to emphasize the need to give beneficiaries enough information to protect their rights. California, North Carolina, Delaware and Vermont courts have all struggled with the issue.
HELP FROM DELAWARE
Delaware, however, tends to prioritize a donor’s explicit intent, including a desire to create a silent trust. In a well-known Delaware case, a trustee was held liable, in part, for not disclosing a beneficiary’s interest in a trust after the beneficiary and his attorney requested such information on several occasions.
Following that case, the Delaware State Legislature codified a rule that a trust agreement may permit a silent trust for a period of time. This statute was recently amended to provide guidelines for drafting such a provision, and to provide for a surrogate to act on behalf of beneficiaries while they are unaware of the trust.
Silent trusts are not intended to be silent forever: their existence is usually revealed after a beneficiary reaches a certain age. Silent trusts can also specify that disclosure can be made after a certain event has occurred, such as final settlement of a beneficiary’s divorce, graduation from college or some other significant milestone that is certain to occur.
PROS AND CONS
The most commonly cited disadvantage of a silent trust is that an unknowing beneficiary has no way to monitor a trustee or protect his interests. The duty to inform is intended to address this, to make certain that beneficiaries will have enough information to ensure that a trustee is properly administering the trust and managing its assets responsibly. From the trustee’s perspective, a silent trust makes it impossible to discuss a beneficiary’s needs.
These disadvantages potentially can be minimized by a carefully drafted trust, prepared by an experienced attorney. For example, a silent trust can keep the trust confidential for a limited period of time and name a representative to advocate for the beneficiaries during the silent period. Also, the donor can retain the power to terminate the confidentiality period and disclose the trust if the need arises.
Silent trusts are not for everyone. However, if structured well, the trusts can protect the donor’s family members without tainting the growth and development of the beneficiaries - while they learn and understand the responsibilities that come with the family's wealth.
Jocelyn Margolin Borowsky is a partner in the Wilmington, Del. office of international law firm Duane Morris.
Adrienne M. Penta is a senior vice president in the Boston office of Brown Brothers Harriman.
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