Silent Trusts

“Silent Trusts,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Stacy Singer, ACTEC Fellow from Chicago. What are the disclosure requirements for beneficiaries, and what is the legislation that allows the creation of silent trusts? What are some of the problems posed by silent (trusts), and how does the designated representative status solve many of those problems? And finally, what are some open issues when you’re using a silent trust? To answer these questions, you’ll be hearing today from ACTEC Fellows David Blickenstaff of Chicago, Michael Gordon of Wilmington, Delaware, and Michaelle Rafferty of Reno, Nevada. Welcome Michaelle, Dave, and Michael; and Michael will get us started.

Uniform Trust Code

Thank you, Stacy. Most state laws impose requirements on trustees to keep current and presumptive remainder beneficiaries of the trust reasonably apprised of their beneficial interest in the trust. This also requires the trustees to provide the beneficiaries with information regarding the existence of the trust, a copy of the trust instrument, and with trust account statements on a periodic basis. These default disclosure requirements are evidenced in both the Uniform Trust Code and the Restatement (Third) of Trusts. The comment to Section 813 of the Uniform Trust Code states that one of the fundamental duties of a trustee is to keep the beneficiaries reasonably informed of the administration of the trust. It should come as no surprise then that the Uniform Trust Code imposes broad disclosure requirements upon a trustee.

The most notable Code Section is Section 813 of the Uniform Trust Code. Section 813(a) of the Uniform Trust Code provides that a trustee must keep qualified beneficiaries reasonably informed about the trust administration and of material facts necessary to allow them to protect their beneficial interests in the trust. The Uniform Trust Code goes on to define the term qualified beneficiaries as the current beneficiaries and those that would take if the current interest were to cease – so current and presumptive remainder beneficiaries.

These same default disclosure requirements are also seen in the Restatement (Third) of Trusts. Section 82(1)(a) provides that a trustee must promptly inform fairly representative beneficiaries of the existence of the trust, of their status as beneficiaries, and their right to obtain further information upon request. These default disclosure requirements often frustrate grantors who are creating irrevocable trusts. Grantors fear that a beneficiary’s knowledge of the wealth in the trust can result in a disincentive for the beneficiary to achieve his or her own success. This is especially true where the trust holds substantial assets. As a result of this concern, many jurisdictions have enacted legislation which permits a trust instrument to eliminate the trustee’s duty to inform the beneficiaries for a period of time. This period of time is often tied into the age of a beneficiary, or sometimes the lifetime of the grantor, and the grantor’s spouse. We call these trusts that delay notification silent trusts or quiet trusts. And while they are very attractive to grantors, the silence can often pose problems. And with that, I’m going to turn things over to Dave to discuss that very issue.

Silent or Quiet Trusts – Designated Representatives

Thanks, Michael. Michael, as you explained, there are some good reasons why settlors might want to prevent beneficiaries from getting information about a trust or even knowing about it at all. And in many states, they are allowed to restrict who knows what, when, but that silence comes with a bunch of downsides. If the beneficiary doesn’t know about the trust or can’t get information about it, how can she hold the trustee accountable? From the trustee’s perspective, how does the statute of limitations start running when you can’t keep your beneficiary informed? If the beneficiary can’t get information about the trust, can he sign a nonjudicial settlement agreement, which is a powerful tool many of us use regularly? The beneficiary can’t consent to the trustee’s conduct, for example, with decanting or a decision about how to handle a closely held asset when the beneficiary doesn’t know about it. And from a loss prevention standpoint for the fiduciary, one of the main ways to prevent litigation, or at least limit its impact, is to keep people informed. It promotes better trustee beneficiary relationships, which reduces the chance the beneficiary will complain at all. It undercuts the hindsight argument that the trustee should have seen something coming because the beneficiary knew about it and didn’t see it coming either. And it tends to make the trustee look better. When you keep people in the dark, the assumption is you’re up to no good.

So, in light of those concerns, what do we do? Well, enter the designated representative – a surrogate to stand in and receive disclosure and hold the trustee accountable. This is someone who is either named in the trust instrument or sometimes appointed by someone authorized to do so in the trust instrument, and occasionally appointed by a court to act on behalf of the beneficiary. For example, you have a young adult beneficiary, or perhaps someone with a substance abuse problem, and you don’t want them to know about the trust. So you designate someone to act on their behalf. A few state statutes, including one in my state of Illinois, specifically provide for designated representatives. In many other states, there’s no statutory grant of authority, but there’s also no prohibition.

The designated representative can represent and bind the beneficiary they represent for purposes of receiving notices and accountings and the type of information that Michael described for signing NJSAs and in court proceedings, or some subset of those depending on what the trust instrument says. You get the benefits of disclosure to a beneficiary, including starting the statute of limitations while still fulfilling the settlor’s goal of keeping the information out of the beneficiary’s hand. Again, the designated representative stands in for the beneficiary. So, it’s an elegant structure, an elegant solution that solves many of the problems that silence creates. But there are still some practical issues and open questions. And with that, I’ll turn it over to Michaelle.

Silent Trust Provisions

Thank you, Dave. Yes, there are some practical issues that we have to face with this, and one of the issues is the laws vary greatly from state to state. So while we also have the UTC and the Restatement to look to, a lot of states have very specific statutes, and there’s not necessarily any uniformity in those statutes. So, you’ve got to look at the state that you’re dealing with and the particular trust. You also need to think a little bit more broadly with regard to situs and situs changes. We live in a world where people are moving trusts from one jurisdiction to another. And if the goal is to have silent trust provisions in the trust, you need to make certain that those situs provisions are taking into account where this trust may go, or perhaps restricting where it may go, related to those silent trust provisions.

There are also issues to decide with regard to the designated representative. While Dave has correctly stated the wonderful things that the designated representative can do, there are some issues with regard to who is going to serve in that particular position. Some states require a lawyer or an accountant — a CPA — to be able to serve in those positions. Others don’t place those types of restrictions. And in some states, the limitations are that the beneficiary will designate, which means that in those circumstances, clearly, the beneficiary already knows that there’s a trust. So, you’ve really got to look to those state law issues as to who you are going to have to name, or who you can name, to see if you can have a structure that will fit for your particular client’s needs.

The other thing you have to worry about is how long you can let these silent trusts go. Some jurisdictions are very specific in that timeframe. Others are very open, but don’t say that it can go forever. So, trying to figure out how long you can allow your silent trust provisions to run is a really important factor. I also want to note that in some cases, you have to be aware that you’ve got circumstances where a fiduciary might not be the good person in this situation. And the beneficiaries need to have some way, perhaps at some point, to be able to step in, even in place of a designated representative.

Designated Representative Fiduciary or Nonfiduciary?

It’s also a question, and really there’s not a firm answer to this one, as to whether the designated representative will be a fiduciary or a nonfiduciary. This is one of the major issues that we see playing out throughout the United States, creating a bit of litigation and potentially laying the ground for future litigation over these positions. Of course, a trustee would love to have the designated representative be a fiduciary, so that the fiduciary duties will help to protect the trustee in the circumstance. On the other hand, the designated representative may not want that level of liability, and furthermore, may not wish to take the position if that’s what it’s going to require. So, these are really interesting areas to be able to watch. I think we’re going to see how this plays out in the next, probably, five or so years. And with that, Stacy, I will hand it back to you.

Thank you all so much for educating us on the benefits and pitfalls of silent trusts.

You may also be interested in The Uniform Trust Code and the Future of American Trust Law.

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