Some people, especially the very wealthy, are uncomfortable with the idea that their children know they are the beneficiary of a trust. Knowing that you will inherit a large sum of money can adversely affect how you plan and approach your life. We all hear stories of “trust fund babies” who wait for their trust fund money, squander it all, and then have nothing to show.
Some adult children who are former trust beneficiaries wish they had never known about their inheritance. It can be hard to maintain the motivation to work hard through college and in the early phases of a career when you know you will inherit enough money to last your lifetime.
A silent trust may be the perfect solution to prevent these situations from occurring.
What is a silent trust?
A trustee is a person appointed by the trustmaker or grantor to run the trust. The trustee has certain legal duties and obligations, though these may vary by state.
In most states, the trustee must:
- Disclose the trust’s existence
- Identify themselves as the trustee
- Send yearly accounting statements to the beneficiaries if they request more information about the trust’s assets, taxes, distributions, and performance
Creating a silent trust eliminates the legal requirement that the trustee tells the beneficiaries about the trust’s existence, at least for a certain time.
Typically, an event will trigger the requirement to notify the beneficiary.
Triggering events for a silent trust may include:
- The beneficiary reaching a certain age
- A milestone such as graduation
- The trustmaker’s death or incapacity
Benefits of a Silent Trust
A silent trust comes with several benefits:
- Maintains the trustmaker’s financial and estate plans confidentially, at least for a while.
- Delays knowledge of the trust until the beneficiaries are more likely to behave in a fiscally responsible way.
- Reduces the risk that beneficiaries are targets of frauds, scams, theft, or frivolous lawsuits.
- Keeps beneficiaries from having knowledge about family finances and how the family business is managed.
Drawbacks of a Silent Trust
There are several potential downsides to a silent trust:
- Reduces supervision of the trustee’s actions when managing the trust.
- Increases the likelihood of trust mismanagement and breach of fiduciary duty.
- Delays the time to detect trust mismanagement and potentially correct issues before irreparable damage is done.
- Misses the opportunity to teach children how to effectively manage their money.
Some states require trustmakers to select a beneficiary surrogate or designated representative.
This person will receive trust information that would otherwise be distributed to beneficiaries. This system of checks and balances can help mitigate the risk of trust mismanagement.
Should You Consider a Silent Trust?
Currently, the ceiling for the lifetime estate tax is $12.08 million. In 2025, this will drop to $5 million (adjusted for inflation). People with high net worth who have an estate with a value higher than these cutoffs may want to consider creating a trust. Transferring assets to a trust during their lifetime may help them avoid having their assets included in their estate at their death.
Silent trusts are an option for parents who want to move their assets into a trust for tax purposes but who worry about the effect of transferring wealth to their beneficiaries, especially at an early age.
Silent trusts are only permitted in:
- New Hampshire
- South Dakota
If you do not live in a state that permits creating silent trusts, you can create a trust in a state that does allow them, but you will need a trustee, such as a trust company located in that state.
If you are interested in creating a trust, whether silent or not, please get in touch with us, and we can help you create an estate plan that keeps your finances as confidential as possible.