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. Although there may be a number of good reasons for high-net-worth individuals to create a trust with their children as beneficiaries, the phrase “trust fund baby” immediately brings to mind images of apathetic adults living lavish, substance-abusing lifestyles with no need or desire to work and no purpose or direction in life. 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. Although a trustee’s duties vary by state, in most states, a trustee must disclose the trust’s existence, identify themselves as the trustee, and send the beneficiaries yearly accounting statements on request 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 or terms 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 begin only upon the occurrence of the triggering event.
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 beneficiary scrutiny of 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 that require the selection of a beneficiary surrogate or designated representative who receives the required information and notices on the beneficiary’s behalf.
Another downside is that a silent trust may not actually be very 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 they probably expect to receive a share of it in some form, even if they do not know of the trust’s actual existence. 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 beneficially used 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 that will transfer their assets during their lifetime to avoid including the assets in their estate at death. Currently, 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: Alaska, Delaware, New Hampshire, South Dakota, Nevada, Tennessee, and Wyoming.[2] 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 becoming trust fund babies, 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 various estate planning strategies that can help you meet your unique goals and wishes.
[1] Confidential Trusts, Wealth Management at Northern Trust (Jan. 2017), https://www.northerntrust.com/documents/white-papers/wealth-management/insights-on-confidential-trust.pdf.
[2] Al W. King III, Should You Keep a Trust Quiet (Silent) from Beneficiaries?, WealthManagement.com (Mar. 25, 2015), https://www.wealthmanagement.com/estate-planning/should-you-keep-trust-quiet-silent-beneficiaries.