Individuals usually create a trust because they want to protect and provide for loved ones. However, it’s common for them to be concerned about how knowledge of the trust assets might affect their beneficiaries and the actions of third parties. Beneficiaries might be less motivated to get an education, work hard, and/or be financially responsible if they know they can rely on money from a trust. They may also be vulnerable to third parties, including creditors and scam artists, who may seek to take advantage of the beneficiary’s perceived wealth. One popular option to address these concerns is the so-called “quiet trust,” which is a trust that either greatly limits or entirely prohibits the disclosure of information to beneficiaries. With a quiet trust, beneficiaries may not be informed of the existence of the trust, the terms of the trust, the identity of the beneficiaries, and/or the trust assets depending on what is permitted by the trust document and applicable state law.
Quiet Trust vs a Typical Trust
Generally, in a typical trust, trustees must disclose the existence of the trust and the identity of the trustee. They also must provide a copy of the trust document and fiduciary accountings to the beneficiaries, at least upon request.
In a quiet trust, generally, there is no requirement to inform beneficiaries of the trust’s existence or provide them with a copy of the trust document. There is also no requirement to provide an accounting. The trust document can even prohibit these disclosures.
Benefits and Drawbacks of a Quiet Trust
In addition to addressing concerns about how the beneficiary may react to the trust, a quiet trust also allows trust creators (i.e. settlors) to maintain confidentiality of their finances and estate planning. Further, it protects the trustee from the beneficiary’s scrutiny of the trustee’s investment and management of the trust, and management of the family business interests, where applicable.
The disadvantage of a quiet trust is that it may increase the risk of future litigation when the beneficiaries learn about the trust and/or question the trustee’s actions due to a lack of information about the trust. Beneficiaries are also not able to act as a check on the trustee’s conduct, a particular concern once the trust’s creator dies.
Quiet Trusts in Different States
Generally, there is no requirement for someone to disclose their assets. However, trusts can create a disclosure obligation, which can vary by jurisdiction. Truly quiet trusts are only permitted in a few states, notably Delaware.
Uniform Trust Code (UTC) / Connecticut Law
The UTC is a model law regarding trusts that states may choose to adopt. Connecticut has adopted the UTC’s default disclosure and notification provisions. These establish specific disclosure requirements but some of them can be waived in the trust instrument. However, a trust cannot waive the trustee’s duty to inform qualified beneficiaries of the trust upon attaining age 25. The trustee’s duty to respond to a request of a qualified beneficiary of an irrevocable trust for information related to the trust’s administration also cannot be waived.
Importantly, the law allows for the appointment of a “designated representative.” This is a person appointed to stand in the place of the beneficiary to receive required notices and act on behalf of a beneficiary. This provision allows for many of the same benefits of a quiet trust to be realized.
New York Law
In New York, there is no explicit statute authorizing quiet trusts. While a trust may limit disclosure in certain instances, state statutes obligate the trustee to provide fiduciary accountings and respond to information requests from interested parties. Further, trustees must give beneficiaries an annual statement of the trustee’s commissions in certain circumstances. This is required if requested by the beneficiaries, even if no commissions were taken.
Delaware state law allows for truly quiet trusts for a “reasonable” period of time. In this situation, a designated representative must be appointed who is authorized to bind a beneficiary in any judicial proceedings or non-judicial matters such as consents, releases, and ratifications of the trustee’s actions. The designated representative is deemed to be a fiduciary, owes a fiduciary duty to the beneficiary, and may be liable for breach of that duty.
Importantly, creating a Delaware trust requires selecting a Delaware-based trustee, which for most people means a professional trustee who must be paid.
Opting for a Quiet Trust
Before creating a quiet trust, settlors should consider whether their concerns about privacy and their beneficiaries can be addressed with reasonable limitations on the statutory disclosure rules without the need for a truly quiet trust. Further, settlors must understand their options in different jurisdictions and the pros and cons of creating a quiet trust in a specific state.
If you are contemplating a quiet trust, it is important to work with experienced legal counsel. Our firm can evaluate your circumstances and help you determine the best way to achieve your goals.