SILENT TRUSTS - COULD I BE THE BENEFICIARY OF A TRUST AND NOT KNOW IT?
People who have accumulated a substantial amount of wealth during their lifetime are often reluctant to disclose the full extent of their wealth to their children. There are several good reasons for high-net-worth individuals to create a trust with their children as beneficiaries. There are also several reasons why they may not want to let their children know about it. The phrase “trust fund baby” immediately brings to mind images of spoiled, lazy adults living lavish lifestyles. Creating a silent trust may be the solution to such nightmarish beneficiary-gone-wrong scenarios.
WHAT IS A SILENT TRUST?
After a trust has been created, the trustee has certain legal duties to the beneficiaries. In most states, a trustee must disclose the trust’s existence, identify themselves as the trustee, and send the beneficiaries yearly accounting statements with information about the trust’s assets (accounts and property), taxes, distributions, and performance.[1]
A silent trust eliminates the legal requirement that the trustee tell the beneficiaries about the trust’s existence - for a period of time. Typically, a silent trust’s terms will provide for a triggering event, such as the beneficiary reaching a certain age or achieving a certain milestone or the trustmaker’s death or incapacity. The trustee’s obligations to inform the beneficiary only begin when this triggering event happens.
BENEFITS OF A SILENT TRUST
A silent trust that does not require the disclosure of information to beneficiaries has numerous benefits:
Keeps the trustmaker’s financial affairs and estate plans confidential
Reduces the risk that beneficiaries will engage in financially irresponsible behavior because of their expectation of receiving trust money
Reduces the risk that beneficiaries will become the targets of fraud, scams, theft, or frivolous lawsuits
Avoids family conflict about trust asset management, particularly when the management of a family business is included
DOWNSIDES OF A SILENT TRUST
A silent trust also has downsides. Reduced trustee supervision is one of the most obvious drawbacks. If a beneficiary has no knowledge of or information about a trust, they cannot supervise the trustee and ensure that the trustee is acting in their best interests. A trustee’s breach of fiduciary duty may not be discovered until years later after a great amount of damage has already been done. This downside may not be much of a concern, however, in states like Ohio. Ohio requires the selection of a beneficiary surrogate, a designated representative who receives the required information on the beneficiary’s behalf.
Another downside is that, in some cases, a silent trust may not be effective at discouraging a beneficiary’s financially irresponsible behavior. Although children may not know the full extent of their parents’ wealth, they know that the wealth exists, and probably expect to receive a share of it in some form. Choosing to keep children in the dark about the family’s wealth can result in missed opportunities to involve them and educate them about how wealth can be acquired, managed, and preserved.
SHOULD I CONSIDER A SILENT TRUST?
High-net-worth individuals who expect to have a taxable estate may want to consider creating a trust. A trust can help people avoid estate taxes by transferring asset ownership during their lifetime. As of April 2022, an estate larger than $12.06 million is subject to estate tax, although in 2025 that amount will drop to $5 million (adjusted for inflation). Parents who want to create trusts to transfer wealth but who worry about the effect such large wealth transfers may have on their beneficiaries may want to consider including silent trust provisions.
Silent trusts are permitted in only a handful of states. If you live in a state with a silent trust statute, you can include silent trust provisions when you create a trust. If you do not live in a state that allows silent trusts, you can create the trust in a state that does. You will, however, have to use a trustee (such as a trust company) located in that state.
If you worry about your beneficiaries abusing their trust money, or if you just prefer to keep your financial and estate plan as private as possible, we are happy to meet with you to discuss your estate planning options. The experienced estate planning attorneys at DuPont & Blumenstiel can help you meet your unique goals and wishes. Give us a call at 614-389-9711.
Learn more about how to use trusts in estate planning by reading A Consumer's Guide to Estate Planning in Ohio.
[1] Confidential Trusts, Wealth Management at Northern Trust (Jan. 2017), https://www.northerntrust.com/documents/white-papers/wealth-management/insights-on-confidential-trust.pdf.