What Is A Silent Trust?
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A “silent trust” sounds like a secret handshake between two people, giving one party access to another’s assets without the knowledge of any other parties. In fact, it is a contract between two individuals that can be either revocable or irrevocable depending on the terms established by both parties.
This type of trust is also referred to as a “confidential trust” or “quiet trust“. While the term “silent” is somewhat of a misnomer, the term “confidential” perhaps better describes the nature and function of this type of trust. This articles uses the terms interchangeably.
This article will explore the characteristics, benefits, and drawbacks of a silent trust. Silent trusts are complex legal instruments that have been used for centuries to transfer wealth among individuals and families. The primary purpose of these trusts is to maintain privacy while still providing an effective means of managing and preserving assets.
This article will also discuss the technical aspects of this type of trust as well as potential advantages and disadvantages associated with them.
Definition Of A Silent Trust
Generally speaking, a trust is used to facilitate the transfer of assets between individuals. A trust is created when a settlor, or individual who owns the property placed in the trust, entrusts a fiduciary, the trustee, to manage the property in accordance with their instructions for the benefit of another, the beneficiary.
Silent trusts are known as quiet trusts due to the fact that the existence of a trust or information about a trust is not provided to the beneficiary and therefore remain confidential. In order for a silent trust to be valid, certain conditions must be met.
There are only a few states that allow confidential trusts. Nevada is one of them. Various states require slightly different things. Under Nevada law, the grantor may eliminate or restrict the right of a beneficiary to know of the trust’s existence for a period of time. NRS 163.004.
The trustee’s duty to inform the beneficiaries may be restricted, for example, until the beneficiary reaches a certain age. Until that age, the beneficiary’s right to receive a copy of the trust or any information about the trust’s assets is restricted or prevented altogether by the trust provisions.
Unlike Delaware statute, Nevada law does not specify how the period of time is to be determined. In addition to specifying a certain age, the trust document could use a the grantor’s death, a term of years, or a specific date, to determine the period time during which the trust remains “quiet.”
As with trusts generally, the settlor must specify the purpose of the trust, provide instructions for its management and also designate beneficiaries; all necessary documents must be appropriately signed and notarized. Furthermore, all parties involved in the transaction must comply with state and federal laws governing trusts.
The trustee has an obligation to carry out the terms of the silent trust according to the settlor’s wishes. This includes ensuring that any distributions from the trust are made in accordance with those terms and that assets are managed prudently with respect to investments or other financial instruments.
So, what are the potential benefits associated with the use of a silent trust?
Benefits Of A Silent Trust
A silent trust is an incredible tool, capable of accomplishing important estate planning and asset protection goals. Beyond transferring wealth and meeting certain estate tax objectives, this type of trust has the power to:
- Protect privacy;
- Prevent “trust fund babies” by avoiding the decline in self-motivation of a beneficiary;
- Reduce feelings of discomfort for those beneficiaries that feel embarrassed by the family’s wealth; and
- Discouraging a beneficiary’s potential financial irresponsibility.
Often high-net-worth individuals have concerns about their family members’ ability to deal appropriately with the knowledge of the family’s wealth. And it is often young adults who are the subject of this concern.
Some parents do not like the idea that their children may decide not to follow their own plans or passions just because they may inherit a large sum of money some day. The settlors of the quiet trust may desire that they child learn to rely on their own initiative and skills in pursuing a productive and meaningful life.
Disadvantages of Silent Trust Provisions
In order to maintain confidentiality, the trustee must not provide trust information to the beneficiaries. This can lead to problems.
If an inexperienced individual is used as trustee, he or she may not understand or appreciate their fiduciary duties. And consequently, although innocently, the trustee may mishandle trust property, and no one would know.
Or worse, a dishonest trustee may even misappropriate trust money, and no one would know.
However, if a reliable trust company is used as trustee, these problems are less likely to occur. And it would be a good idea to name a designated representative with the authority to monitor the trustee’s administration of the trust and receive yearly accounting statements on behalf of the beneficiaries without the beneficiaries knowing about the trust.
By using a representative, or trust protector, a beneficiary doesn’t need to know about the family business, but someone can at least monitor the trustee and make sure the quiet trust is being administered in the best interest of the beneficiary.
Some professional trustees may be uncomfortable with the idea of a confidential trust, especially if the trust agreement allows for the discretionary distributions to or for the benefit of a beneficiary prior to the time designated for informing the beneficiaries of the existence of the trust.
By using a trust protector as a “beneficiary surrogate”, the trustee would have someone to whom they can fulfill their duty to inform and report on a regular basis.
Future Disclosure to a Beneficiary
As explained above, a confidential trust is one in which the trustee does not inform the beneficiaries about the trust’s existence. This means that, while the trust exists and may be actively managed, the beneficiaries are unaware of its existence.
However, there might arise a situation where it becomes necessary to or leads to the disclosure of the trust to the beneficiary. For instance, the beneficiary needs to be aware of their beneficial interest when entering into an agreement requiring disclosure of any beneficial interest, such as when applying for a loan or when dealing with a premarital agreement.
The existence of a trust may come to the beneficiary’s attention inadvertently, causing a conflict between the trustee’s directive to only report to the trust protector and the statutory obligation towards the beneficiary.
To address such scenarios, the trust can include provisions for limited information disclosure and provide instructions to the trustee and trust advisor under such circumstances.
Legal Requirements Of A Silent Trust
The general legal requirements for a silent trust are similar to those for any other type of trust. The settlor must provide a valid description of the asset being transferred into the trust, as well as details on how it will be managed by the trustee. Additionally, there must be clear documentation that outlines any beneficiaries and their rights under the trust agreement.
There must also be a clear understanding between all parties involved regarding when or if they should communicate information pertaining to the existence or terms of this kind of trust to potential beneficiaries.
Quiet trusts are not permitted in most states. About 31 states have laws mandating that the trustee disclose the trust’s existence, the trustee’s identity, and provide annual statement if requested by a beneficiary. But many of these statutes allow the settlor to postpone telling a beneficiary of a trust until the person is 25 years of age.
The few states that have adopted statutes allowing for confidential trusts vary in there legal requirements. Some, such as Delaware, require the document to specify the period time by relating it to specifically listed things.
Nevada’s statute, on the other hand, simply states that the trust agreement may restrict a beneficiary’s “right to be informed of the beneficiary’s interest for a period of time.” While the statute doesn’t require the “period of time” to be tied to a specific statutorily listed item, the document should allow the trustee to clearly determine what the period of time is.
Frequently Asked Questions
How Much Does It Cost To Set Up A Silent Trust?
Creating a silent trust may be more expensive than other types of trusts due to its complexity.
Typically, the cost to set up a silent trust can range from a couple thousand to a several thousand dollars depending on the size and scope of the trust. Whether you are setting up a stand-alone quiet trust, or incorporating it into your existing living trust, will factor into the cost.
The attorney can provide an estimate for their services prior to setting up the trust.
It is important to note that additional costs may be incurred during the administration process.
How Long Does It Take To Establish A Silent Trust?
Establishing a silent trust is not a process to be rushed. It requires careful thought, research and planning, with typically complex legal and financial considerations.
On average, the trust will be drafted within 4-6 weeks; however, this timeline can vary depending on the complexity of the trust’s structure, provisions, and client interactions.
What Taxes Need To Be Paid On A Silent Trust?
The taxes related to a silent trust are generally the same as those for any other trust, including federal income tax and estate tax. Depending on the terms of the trust, there may also be state and local taxes that need to be paid.
If the silent trust is established during the grantor’s lifetime, it may be a grantor trust for income tax purposes. In which case, the trust income is taxed to the grantor.
If it is a non-grantor, irrevocable trust, then the trust will be liable for the income tax due on trust income that is not distributed. Which, if it is a confidential trust, then the income is not likely to be distributed.
In either event, it is important for all parties involved to understand what taxes are due and when they are due in order to ensure compliance with all relevant regulations.
How Does A Silent Trust Compare To Other Forms Of Trusts?
This type of trust can offer greater privacy protection than other forms of trusts, such as revocable trusts, because there is no requirement that the beneficiary be informed about the details of the trust.
By comparison, trusts that require trustees to make certain disclosures to beneficiaries can avoid the potential pitfalls of confidential trusts, as mentioned above.
The primary difference between these two types of trusts is the level of disclosure required by law.
What Happens To The Assets In A Silent Trust After The Beneficiary Passes Away?
Just as with other trusts, in a silent trust, assets are held in trust for the benefit of the beneficiary. Upon the passing of the beneficiary, those assets pass to the remainder beneficiaries of the trust pursuant to the terms therein.
The settlor may want to consider creating a trust that continues for several generations. In Nevada, the trust could continue for up to 365 years.
The silent trust is a powerful tool for asset protection and estate planning. It allows you to create an arrangement that protects a young beneficiary from their own financially irresponsible behavior. Through thoughtful tax planning, it can help preserve wealth for future generations.
With proper administration, this type of trust can provide lasting security and peace of mind for those who are looking to safeguard assets for their loved ones. Sensible stewardship and strategic structuring should be employed when establishing a silent trust in order to ensure that its purpose is fully realized.
A knowledgeable lawyer can be invaluable in helping create an arrangement that fits the needs of the grantor, beneficiary, and any other related parties.