The Pros And Cons Of Silent Trusts

They’re not right for every family, but there are times when a silent trust is a good idea.

A silent trust is one that isn’t revealed to the beneficiary by either the trustee or trust grantor (or creator). The trustee manages the assets and usually doesn’t make distributions to the beneficiary. After a period of years, the trustee reveals the trust to the beneficiary, as directed in the trust agreement.

Some states don’t allow silent trusts. They believe a beneficiary should know about a trust to ensure the trustee isn’t mismanaging it. The status of silent trusts isn’t clear in some other states, and some states specifically allow them.

For example, Michigan recently enacted a law allowing silent trusts that aren’t disclosed to the beneficiaries for up to 25 years. At the 25-year mark or before, the beneficiary must be informed of the trust.

There are multiple reasons someone might want to create a silent trust.

Some people don’t want young beneficiaries to know the details of a trust, because they think knowing they’ll receive the wealth in the future might inhibit the beneficiary’s full development, such as by reducing the motivation to accomplish things.

Some people want a trust to be a secret when the beneficiary has substance abuse, behavioral, or mental health issues.

Withholding knowledge of the trust also can be helpful when the beneficiary has current or potential problems with creditors.

When a beneficiary is in a troubled marriage or other relationship, keeping the trust a secret could protect the assets and keep the trust out of litigation.

Some people want to keep a trust secret for a while because they are treating beneficiaries unequally and want to delay when the beneficiaries know that.

Sometimes a person creates a trust to benefit himself for life with the remaining assets going to beneficiaries. The trust grantor doesn’t want the beneficiaries to know the details, either out of fear the beneficiaries would act differently or because the trust allows the grantor to change the beneficiaries.

A silent trust doesn’t have to be a complete secret. Some silent trusts provide the beneficiary can be provided limited information. A trust grantor might want a beneficiary to know a trust will provide some wealth in the future but not the amount in the trust or when it will be distributed.

When creating a silent trust, the grantor should name one or more people to oversee the trustee, receive trust accounting information, and perhaps have the power to replace the trustee in some circumstances.

But a silent trust isn’t for every estate.

The existence of a silent trust might make it less likely that a beneficiary will learn how to manage a large amount of money and become comfortable with it.

Perhaps it would be better for the beneficiary to know about the money and receive it in stages.

When wealth is to remain in a trust for an extended period of years, keeping the trust a secret might not have anu value. When the trust and its terms are disclosed, the beneficiary would know the money is out of reach for a long time.

When a trust is a secret, the trustee can’t have candid conversations with the beneficiary and might not acquire all the information needed to manage the trust for the beneficiary’s maximum benefit.

Also, it’s difficult for the trustee to make distributions for the beneficiary during the silent period without arousing suspicions and questions about the source of the money.

The requirement of silence also might reduce some of the trustee’s flexibility and the range of actions that can be taken.

Before creating a silent trust, talk about all the angles with an estate planner and consider both the advantages and disadvantages.