A silent trust is one where the beneficiaries are not aware of its existence. Why would a grantor want to create a silent trust? The grantor may not want to discuss how she designed the residuary distribution provision of the trust, as it may breed family conflict. Or, the grantor may think that if a beneficiary knows that he is set up for an inheritance, he will become lazy or a spendthrift. In any event, the grantor wishes for the trust to be kept a secret. Are these types of trusts allowed?
Whether a silent trust is legal is a matter of state law. In some states, a silent trust is possible. States that have enacted the Uniform Trust Code (UTC) may allow for silent trusts. The official version of the UTC, in Section 105(b)(8), states that the trustee has a duty “to notify qualified beneficiaries of an irrevocable trust who have attained 25 years of age of the existence of the trust, of the identity of the trustee, and of their right to request trustee’s reports”. However, virtually every state that has enacted the UTC has its own nuanced provisions and some have modified or deleted this provision.
Yes, silent trusts are allowed in some states, including Delaware, New Hampshire, and Nevada. As with any planning, most clients could have the situs of their trust in one of these states if they really wanted to. But is it advisable? What are some issues to look out for when creating a silent trust?
When creating a silent trust, the first issue to think about is trustee accountability. If the beneficiaries aren’t aware of the trust, how can they hold the trustee accountable? What if the trustee is derelict in his duties and doesn’t manage trust assets prudently? In the inverse, how would the trustee know when certain statutes of limitation start running, to manage personal or professional risk? And other issues may arise, such as gaining beneficiary consent in order to decant.
There are also trust administration considerations. Since the situs is restricted to states that allow silent trusts, would there be other hindrances to trust administration in those jurisdictions, such as higher tax rates or more tax filing requirements? Would certain tax exemptions be lost? Does state law require the trustee of a silent trust to be an accountant, lawyer, or other professional fiduciary? Is the client aware that the fees will likely be higher for such services?
One practical way to counsel clients is to ascertain why they want a silent trust and possibly solve their issue in another way. Or, if the client is set on a silent trust, manage their expectations about risk and increased trust administration issues.