In the wake of the “Pandora Papers,” the use of secret trusts has come under fire. The media has depicted secrecy in trust administration as a tactic to allow the wealthy to conceal their riches and avoid tax obligations. With coverage and public outrage focused on the worst examples, less attention has been paid to the value of privacy in estate planning for average individuals. This article will explore “secret” or “quiet” trusts, how they can be used, and some of the reasons for those trusts.
WHAT ARE QUIET TRUSTS?
State laws usually require that trustees provide certain trust information to beneficiaries of a trust. For a variety of reasons, though, a person may not want to share information about a trust—or even the fact of its existence—with a beneficiary. Often, this occurs when the beneficiary is a child. Enter the “quiet” or “silent” trust.
Quiet trusts enable a trustee to avoid giving certain trust information to beneficiaries. Quiet trusts can also allow the trustee to delay the time that trust details are given to a beneficiary (i.e., when the beneficiary reaches a certain age). They can also allow the trustee to provide information to only one beneficiary, or to some other individual who is designated to receive the information, like a trust protector or some other trusted advisor.
WHY USE A QUIET TRUST?
There are many reasons that families and their estate planners opt to use a quiet trust. Many individuals and estate planners decide to utilize a trust, because it provides an extra layer of privacy. Quiet trusts can enhance these privacy benefits by limiting the number of people with knowledge of a trust or its assets. Such limits can help avoid a beneficiary’s misuse or oversharing of trust information, whether inadvertent or intentional. In turn, limited transparency can minimize the risk that a beneficiary is taken advantage of, whether through a scam or some other predatory practice.
Another reason that a settlor may decide to use a quiet trust is to incentivize their children to make their own way in life. Most parents want to make sure their children develop a sense of fiscal responsibility and the tools needed to manage funds appropriately. They also want their children to find a career path and have the ability to earn their own income. Withholding trust information until the child has reached a certain age (or, in another formulation of the same idea, until the child has obtained a degree or chosen a career path), or only providing general trust information, is one way many parents choose to promote a work ethic and financial responsibility. In the words of Warren Buffett, many parents would like their children to believe they have “enough money so that they would feel that they could do anything, but not so much that they would feel like doing nothing.”1
Finally, limiting trust information provided to a beneficiary can help minimize disputes among beneficiaries or between beneficiaries and a trustee. For example, if one sibling beneficiary gets more money from the trust (often because that sibling needs more financial support than others), that disparity can lead to resentment, simmering family conflict, and, possibly, litigation. Settlors can discourage that type of fighting by limiting information, thereby preserving more of the trust funds for the beneficiaries. This also allows the trustee to make distribution decisions based on individual beneficiary needs without worrying about upsetting others. Although some argue that a lack of information leaves beneficiaries vulnerable to a trustee’s breach of duty, a settlor can minimize that risk by requiring disclosure of all information to a trust protector or other advisor to act as a check on the trustee.
SO WHAT?
Despite the recent publicity and criticism of trust “secrecy,” these types of mechanisms can provide meaningful benefits, particularly to parents who want to pass to their children the family farm, a small business, or their wealth. When used appropriately, privacy protections such as the quiet trust can serve a valuable estate planning purpose and help people achieve their financial goals. If you have questions about privacy protections, quiet trusts, or other estate planning mechanisms, please contact a member of the Robins Kaplan Wealth Planning and Disputes Group.
1 1 Richard I. Kirkland Jr., Should You Leave It All to the Children?, Fortune Magazine (Sep. 29, 1986) https://archive.fortune.com/magazines/fortune/fortune_archive/1986/09/29/68098/index.htm
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