Silent trusts

Wealth transfer to younger generations is one of the biggest concerns for global families today. Many families feel that the younger generations are not ready to handle the wealth they will receive; in fact, only one-third of wealthy parents have fully disclosed their wealth to their children. The perceived unpreparedness, along with a concern for privacy and wealth preservation or asset protection, are some of the key non-tax reasons that many families establish trusts. More and more international families are utilising US trust situs for some or all of their family trusts. Moreover, many of these trusts are extremely large due to the unlimited US gift and generation-skipping exemptions for non-resident aliens and the USD13.6 million gift and generation-skipping transfer tax exemptions in 2024 for US citizens and green card holders.[1] 

Historically, trustees have always provided trust beneficiaries with information regarding trust assets, performance, distributions and taxes. Further, most states require that a trustee provide information regarding a trust to beneficiaries. The duty to inform beneficiaries in the US stems from common law and the Uniform Trust Code. A recent trend, however, has developed with many states, particularly the key modern dynasty trust states, moving to enact beneficiary quiet trust statutes. Beneficiary quiet trust statutes generally provide the settlor the flexibility to waive beneficiary notice of trust assets and keep trust information silent from one or more beneficiaries. A settlor who wishes to keep trust information quiet should include or reference specific statutory language in the trust instrument. The language should demonstrate the settlor’s intent to withhold information from one or more beneficiaries, so protecting the trustee from what might otherwise be considered disloyalty or bad faith. In many instances, a settlor may also explain in a letter of wishes why it was in the best interest of the beneficiaries to keep the trust quiet (silent) as to them. A trust protector will often oversee the quiet (silent) beneficiary’s interest.

Reasons for silence

There are many reasons why a parent or grandparent may want to keep trust information silent as to children, grandchildren or great grandchildren. Some settlors are concerned about promoting fiscal and social responsibility within the family, which may be negatively impacted if a beneficiary has knowledge of a large trust. Alternatively, some parent settlors are concerned that financial secrets can lead to guilt, anger and even shame for a beneficiary. Consequently, these parents may disclose the trust but include various trust incentive provisions associated with any trust distributions, so as to promote fiscal and social responsibility. 

Another key reason for keeping a trust quiet from beneficiaries may be wealth preservation and asset protection. Some clients feel that the less a child or grandchild beneficiary knows about a trust or inheritance, the less chance there is for frivolous lawsuits against that child, undesirable friends, identity theft or even kidnapping. A careless child who leaves a trust statement out in plain view for friends, roommates and other outsiders to see is exposing themselves to potential problems. Additionally, settlors may want beneficiaries with emotional or psychological issues, drug problems, bad marriages or creditor risks to be unaware of their trusts and unable to access trust funds. A quiet trust is also useful when non-voting family business interests are transferred to a trust for estate-planning purpose but the settlor patriarch prefers not to discuss the direction or operation of the business with younger family member beneficiaries. This strategy may make sense if the beneficiaries are not active in the business and their shares are non-voting.

Decanting a quiet trust

Caution must be taken regarding the decanting of a quiet trust. In fact, there is a question as to whether a quiet trust should even be decanted. An advisor should first verify that the new trust situs also has a quiet trust statute. If so, advisors also need to verify whether the decanting statute requires the decanting trustee to provide notice of the decant to the beneficiaries. Many state decanting statutes do not require notice or make notice optional. Other change of trust situs options may need to be reviewed. 

Selecting trust situs

Not all states have beneficiary quiet statutes. The trust the settlor establishes would need to be properly sitused and administered in a state with a beneficiary quiet statute. Alaska, Delaware, Nevada, New Hampshire, South Dakota, Tennessee and Wyoming all have some of the better beneficiary quiet trust statutes. These are the more modern trust law states in the US. Some statutes exempt a trustee from notice requirements only during the life of the settlor or the settlor’s incapacity. Some states allow the trust protector to continue to waive notice even after the death or incapacity of the settlor. Others allow for the waiver of notice but do not allow the trust protector or advisor to modify notice. Flexibility regarding beneficiary notice and the ability to keep the trust silent to one or more beneficiaries are important considerations for situs shopping families. The beneficiary quiet statutes, combined with all of the other modern trust laws in the US, and the stability and safety of the US as a trust jurisdiction have resulted in many international families situsing their trusts in the US.