July 15, 2014

By: Judson M. Stein

Shhhhh! Quiet Trusts

There are a multitude of purposes for creating a Trust – whether the purpose is to protect one’s assets from creditors, prevent a beneficiary’s inheritance from disqualifying them for means-tested government benefits, minimizing taxes, or simply maintaining control over one’s wealth as it passes on to future generations.

A common concern is what to do about wealth getting into the hands of a child when that child may be too young to know how to manage it responsibly. One can give an independent Trustee full discretion to make or withhold distributions to a child, to restrict distributions to a child who has creditor problems, or permit a child to withdraw trust assets upon reaching a certain age. All of these are valid checks on a child coming into too much wealth too early – but in many states a child who is a beneficiary of such a trust has the right to find out exactly how much wealth they are coming into by making a simple request to the Trustee.

To curb the potential for the resultant problems from this knowledge – such as privacy, disincentiving children, or avoiding a potential preemptive challenge – a few states have enacted legislation permitting the “Quiet” or “Silent” trust.

Beneficiaries of a quiet trust agreement will still receive distributions at the desired times, however, they will not be notified of the trust’s existence until the time for distribution arrives. Different jurisdictions provide different laws for how much information must be revealed by a trustee to quiet trust beneficiaries.

New York and New Jersey are two states that have not yet enacted any legislation that addresses the permissibility of the use of quiet trusts. New York’s Surrogate’s Court Procedure Act (SCPA) requires a trustee to furnish information, such as financial statements, to a beneficiary only upon that beneficiary’s request, but is silent as to the duty to inform a beneficiary about the trust’s existence. It is unclear whether the duty to provide annual statements upon request implicitly requires notification of the trust’s existence – for, if a beneficiary is unaware of a trust, they will not know to request statements.

If New York decides to adopt the UTC provisions, which require the duty to inform, trust creators will have more guidance on the quiet trust issue. New Jersey is also currently considering enacting the UTC, but their proposed legislation will also not follow the UTC duty to inform provisions.

Tag: Law of Wills and Trusts