Passing wealth to future generations can be a big decision, and there may be instances where placing assets intended for a child or grandchild in a “silent trust” may be prudent.
In certain jurisdictions, grantors are allowed to include language in their trust documents instructing the trustee to withhold information about the trust from its beneficiaries for a set period of time. This “silent trust” would otherwise operate normally—but the beneficiary would be entirely unaware of its existence until a time of the grantor’s choosing.
“There’s usually a triggering event that determines when the existence of the trust is revealed to the beneficiary,” says Jason Port, an advanced planner at Fidelity Investments. “Age is often used, but it could also be a particular life event, such as graduating college, getting married, or having a child.” Generally, it’s up to the grantor when the beneficiary is made aware, though Port notes that in some jurisdictions, it may be legally required to inform the beneficiary of the trust when they reach age 25.
Why use a silent trust?
As a parent or grandparent establishing a trust for a younger family member, there are a number of reasons why a silent trust might seem like an attractive option.
Maybe you are worried that your beneficiary may be less inclined to pursue certain life or career goals if they grow up knowing that they will be taken care of financially. Perhaps you are concerned about their ability to reckon with the practical details of inheriting a substantial amount of wealth, and are looking to put off having a substantive, in-depth discussion about the money until they have gained more knowledge and confidence with regard to financial management.
Maybe it has nothing to do with the beneficiary at all. Maybe you are simply uncomfortable discussing your wealth with your younger family members or feel that it isn’t appropriate for them to know so much about the inner workings of your finances. While it’s typically an essential part of effective wealth planning, talking about money can be difficult and awkward, especially with family.
Whatever your motivation might be, it’s important to fully understand the implications of making your trust silent—the potential advantages, the possible downsides, and the various alternatives—before settling on a strategy. Doing so may help you and your beneficiaries avoid any headaches down the road.
The advantages of a silent trust
One ancillary benefit to a silent trust is that it adds an additional layer of protection for the beneficiary. Because they are unaware of the trust, they are not obligated to report on its existence in scenarios where they would otherwise be expected to. “If the beneficiary doesn’t know that they are a beneficiary, there’s no expectation that they should have to account for the trust assets, which means these assets won’t be considered in the event of a lawsuit, a divorce, or when filing for financial aid,” says Port.
But the main advantage to a silent trust is that it gives you time, creating a space in which your beneficiary can potentially grow and mature without the prospect of a future windfall looming on the horizon. That said, there are some important considerations and responsibilities that a grantor should be aware of before choosing this path.
The disadvantages of making a trust silent
In practice, the perceived advantage of a silent trust—either protecting the beneficiary from the assets or protecting the assets from the beneficiary—may not be something you can count on. There’s no guarantee that the beneficiary will be any more prepared at the end of the silent period than they were in the first place. And furthermore, the knowledge that the grantor was keeping information from them could lead to hurt feelings and familial discord.
“Not knowing is not always a sound plan,” says Port.
With the beneficiary out of the loop, it may be difficult to ensure the trustee is executing their duties appropriately. “If nobody is watching what the trustee is doing,” says Port, “how can we be sure that the trustee is faithfully following the terms of the trust?”
There’s also a chance that electing to make the trust silent could make it more difficult to find a trustee willing to manage it. “As a trustee, you take on a fiduciary liability, and the only way to alleviate that liability is for the beneficiary to have full knowledge of what you’ve been doing. If you are forbidden to provide the beneficiary with information about the trust, that can’t happen. This exposes the trustee to some degree of risk,” says Port.
Port notes that there may be a solution that addresses both issues. By engaging a third party, like a trust protector or another designated individual, the grantor can help ensure that there is someone to receive information on behalf of the beneficiary, helping to ensure the trustee is operating in good faith, and to help provide the necessary oversight, which may mitigate the trustee’s fiduciary liability.
Making use of the silent period
Just because your trust is silent, that doesn’t mean you should be too. In fact, as a grantor who has elected to conceal the existence of a trust out of concern for the beneficiary’s ability to appropriately handle this knowledge at a tender age, you should take responsibility for aiding the beneficiary’s emotional and financial maturity during the silent period.
It's worth nothing that if you were to take these steps proactively, you may not need to bother with a “silent” trust at all.
“I believe that it’s important to be educating the next generation on the basics of proper financial management,” says Port. “The families that I’ve worked with over the years typically involve younger family members early, whether by introducing them to their financial professionals or setting them up with an account of their own, as a way of helping to prepare them for when they will have to manage the family assets.”
Port also notes that many families find it useful to incorporate their younger members in discussions about charitable giving, which not only can help provide them with basic financial management skills, but also serve as an opportunity to discuss your family’s values with regard to money, values that may guide them when it comes time for them to take the reins.
Another way to address these concerns
If you are concerned about how your beneficiary might use the trust’s assets in the future, there are ways to set up some guardrails without making the trust silent. For example, you may want to specify that distributions from the trust should only be made for certain needs, such as health care or educational-related expenses.
This approach shares a downside with silent trusts, however.
“There’s risk in being too restrictive,” says Port. “We don’t know what the world is going to be like 10 or 20 years from now—and you can’t know what kind of person the beneficiary is going to be that far into the future either. That’s why it’s important to strike a balance between the grantor’s desire to control how the assets will be used and the discretion necessary for the beneficiary to act in the future.”
Consult a professional before taking action
Before making a decision, it’s important to consult with your financial professionals, who can help you evaluate whether any of these strategies may be appropriate for your unique circumstances. With a firm knowledge of your motivations, your beneficiaries, and your assets, they can help tailor a strategy that best suits your needs.