Michigan “Silent Trust” Update

Take-Away: Michigan’s adoption of some form of silent trust legislation as an amendment to the Michigan Trust Code continues to creep along towards adoption. There are pros and cons to the silent trust concept that need to be considered by any settlor and trustee.

Background: Several reasons are often cited why a settlor would not want information about the trust that he/she created to be provided to the trust beneficiaries. Some of those often cited reasons include: (i) the settlor’s financial affairs and estate plan is kept confidential with a silent trust; (ii) a silent trust minimizes the risk that a trust beneficiary will engage in financially irresponsible behavior in light of their expectation of a large financial windfall; (iii) a silent trust minimizes the risk that trust beneficiaries will be targeted for fraud or frivolous lawsuits; and (iv) a silent trust avoids the beneficiary’s scrutiny of the trustee’s asset management, especially in a situation where part of the trust’s assets are a closely held family business interests. Offsetting these perceived benefits of a silent trust are the following perceived negatives: (a) if the beneficiary has no knowledge of or information that pertains to the trust, the beneficiary cannot supervise the trustee to make sure the trustee acts in the beneficiary’s best interest; (b) a silent trust may actually encourage probate litigation if the beneficiary only learns of the trust long after it was created, when the trustee is perceived of being secretive,  and the beneficiary  has concerns about some of the trustee’s past decisions, since the statute of limitations does not run so long as the trust beneficiary is ‘kept in the dark;’ and (c) it is highly questionable that a silent trust is all that effective to discourage a beneficiary’s irresponsible behavior, since the existence of family wealth is seldom much of a genuine secret to family members.

Silent Trust Coming to Michigan?: Part of the Estates and Protected Individuals (EPIC) Omnibus bill that was before Michigan’s Legislature in 2022, having passed in the Senate, but which ‘died’ during the Legislature’s lame-duck session this December, contained a silent trust provision. While the Legislature failed to pass the Omnibus bill this year, it will be reintroduced in the 2023 legislative session, along with its silent trust authorization. Apparently there was no strong opposition to the silent trust provision in the bill, which means that Michigan could permit silent trusts starting as early as sometime in 2023.

Existing Michigan Law: The Uniform Trust Code (UTC) and the Michigan Trust Code (MTC) both generally require that a trustee keep qualified  trust beneficiaries of a trust reasonably informed about the administration of the trust and any material facts for the beneficiary to protect his/her interests in the trust. The silent trust proposal would enable a trust settlor to opt out of some of these obligations to keep a beneficiary informed. Some of the key requirements of the currently mandatory communication duties imposed on a trustee include:

• within 63 days a trustee must notify the trust beneficiaries of the existence of the trust, identify the trust’s settlor, identify where the trust is registered, provide the beneficiary with the  trustee’s contact information, and inform the trust  beneficiaries of their right to request a copy of the trust instrument;
• furnish a copy of the terms of the trust that describe or affect the beneficiary’s interest in the trust along with any relevant information about the trust property to beneficiaries who request such information;
• file an annual report of trust property, liabilities, receipts and disbursements, including the source and amount of trustee compensation- note, a report is not an accounting; beneficiaries do have a right to demand an accounting (more on this below); and
• trust beneficiaries have one year from the time of their receipt of a report from the trustee in which to bring a claim for breach of trust. [MCL 700.7814.]

Rhetorical Question: How many individual trustees do you think actually adhere to all of these fiduciary rules with regard to timely communicating with trust beneficiaries and responding to the beneficiary’s questions? My sense (and fear) is that all too many individual successor trustee opt for the “I’m in charge now, so we will be doing things my way” attitude when they deal with trust beneficiaries or their questions.

Report vs Account: It is important to remember that a trustee’s duty to keep and render accounts is different from a trustee’s duty to issue reports, furnish information, and permit inspection of trust property. [Restatement (Third) of Trusts, Sections 82 and 83.] Consequently, even when the trustee is relieved from its duty to furnish an account to trust beneficiaries under a silent trust, the common law continues to impose a duty on a trustee to provide information to beneficiaries who request it; a trustee’s duty to provide information to trust beneficiaries is much broader than their fiduciary duty to formally account to a trust beneficiary.

Non-modifiable: As a generalization, a trustee’s fiduciary and statutory duty to communicate with the trust beneficiaries is not modifiable under the terms of the trust instrument. [MCL 700.7105(2)(i).] If the trustee departs from the Michigan Trust Code’s  (MTC) duty to account, the trustee will lose the protection of the relatively short one-year statute of limitations. [MCL 700.7905(1)(a).] These rules are intended to balance the need to keep trust beneficiaries informed with regard to the trust’s administration and the trustee’s need for finality in the trust’s administration. While both the UTC and the MTC make most of these rules nonmodifiable, as with much of the UTC, various  states have made their own modifications, thus making the UTC anything other than uniform among its adopting states. This rule would obviously be changed if silent trusts are permitted in Michigan in the coming year.

Examples: Texas originally had a statute that required a trustee to provide both reports and accountings. That law was later repealed which results in the common law now being applied to Texas trustees. In California, a trustee is required to notify trust beneficiaries when a trust becomes irrevocable and provide them with a copy of the trust instrument. California also provides detailed rules on what an account must contain, including copies of all receipts and disbursements, the trustee’s compensation, and the identity of the trustee’s agents and their relationship to the trustee, and the agent’s compensation arrangement, which may be one reason why trust administration in California is so expensive.

The Balance Struck with a Silent Trust: As noted above, there needs to be  a balance between the trust beneficiary’s right to information to enable them to protect their interests in the trust, and the trustee’s need for some finality in its trust administration. The challenge is to find a reasonable balance between the trustee, the trust beneficiary, and the settlor’s intent. A couple of the well-known trust haven jurisdictions that have silent trust authorizations reflect on how such a silent trust attempts to maintain this balance:

Delaware: Delaware’s law requires that a trustee communicate “essential facts.” A trust established under Delaware’s law can provide information to a designated representative who is a fiduciary, and thus limits disclosures to trust beneficiaries for a period of time. Accordingly, in Delaware, the designated representative is substituted for the trust beneficiary. In effect, this shifts the trustee’s responsibility to communicate with and provide information to another fiduciary.

South Dakota: South Dakota’s trust code makes silent trust provisions optional. “[t]he  settlor, trust advisor, or trust protector, may, by the terms of the governing instrument, or in writing delivered to the trustee, expand, restrict, eliminate, or otherwise modify the rights of beneficiaries to information relating to the trust.”  The trustee can provide information for a period of time to a trust protector. The South Dakota law also allows the settlor or a trust protector to limit disclosures to beneficiaries for a limited period of time- the trust protector, not just the trust’s settlor, can specify this period of time. Moreover, this time period can be renewed. Finally, there is a two year statute of limitations in which to bring a breach of trust claim depending upon when the trust beneficiary first received the information.

Other Silent Trust States: Other states that have some form of silent trust authorization include: Alaska, New Hampshire, Nevada, Tennessee, and Wyoming.

Judicial Reaction: In a couple of fairly recent court decisions, where the trust contained restrictive provisions with regard to communications with trust beneficiaries, the court found that those provisions essentially restricted the trust beneficiary’s ability to enforce the trust, and thus those restrictions were void because they did not provide the trust beneficiary with enough information with which to be able to enforce the trust. Other commentators when addressing a silent trust have raised the question whether a trust relationship actually exists when there is a silent trust, or one only of a constructive principal-agent relationship, where the principal is the settlor and the trustee is the agent. These commentator ask the philosophical question that if a silent trust  is  truly a ‘trust’, if the trustee is asked to hide the existence of the trust from the beneficiary and still comply with the applicable tax laws; must the trustee lie to the trust beneficiary when asked questions about the trust? If the trustee is confronted with a request for information from a beneficiary about the terms of the trust, must the trustee lie to the trust beneficiary, or intentionally obfuscate, which could result in a act of actual or constructive fraud against the beneficiary, such that any applicable statute of ultimate repose is tolled. [UTC 1005(c); MCL 700.7905(3)] See,  Rounds and Rounds, Loring and Rounds: A Trustee’s Handbook, Section 6.1.5.1 (2014).

Practical Concerns: There are some obvious situations where either a silent trust may work well, or when a silent trust will frustrate a trustee’s ability to use some modern tools of trust administration.

SLATs: Some individual settlors feel very strongly that the trusts that they create should be silent. The question is whether they have fully considered the implications involved to monitor the trustee if the trust beneficiaries have limited, or virtually no, information with regard to the trust and its administration. Then again,  consider a moderately wealthy married couple who have adopted non-reciprocal spousal lifetime access trusts (SLATs) in 2022 with the goal to exploit their large applicable exclusion amounts while they still exist. While the purpose for the SLATs was to safeguard the settlors’ respective  applicable exemption amounts, the SLATs were principally ‘sold’ to the couple on their ability to indirectly access the trust funds while alive, especially in their retirement years. These individual settlors will probably view the SLAT assets as “theirs” and not for their heirs; they may view themselves as having taken prudent action to save their heirs estate taxes if the assets are not spent down by them, but not with a goal of giving their heirs current rights to the SLAT. Thus, the requirement under the UTC or MTC to notify the trust beneficiaries of the SLATs and to provide annual reports to trust beneficiaries may contradict, or possibly even undermine, the fundamental goals and objectives for initially establishing the SLATs. Consequently, in many instances, it might make more sense, if a SLAT is to be established, to create it in a jurisdiction that specifically authorizes a silent trust.

Trustee Frustration: A trustee of a silent trust will be reluctant to serve because the statute of limitations on  the decisions it made in the administration of the trust will not start to ‘run’ if the beneficiary is uninformed about the trust’s existence, or its administration; that lingering liability will cause many named trustees to decline to serve as a fiduciary of a silent trust. Moreover, the trustee of a silent trust may need to engage the trust beneficiary is some future trust modifications, whether they be in the form of  a nonjudicial settlement agreement with regard to a trust’s administration [MCL 700.7111], a judicial modification with regard to the trust’s dispositive provisions [MCL 700.7411, 7412] or to decant the trust to a ‘new’ trust to address tax or property law concerns [MCL 700. 7820a(7).] In each of these situations, the trust beneficiary will need to be involved in some manner with the trustee’s effort to modify the trust and/or its administration, and with a silent trust, the trustee may not have access to these modern trust ‘tools.’

Conclusion: It appears that settlors in Michigan will soon have the opportunity to adopt a silent trust. The occasions when a silent trust will be warranted are, however,  admittedly limited, and there needs to be a balance against the trustee’s desire to limit its exposure to liability when the statute of limitations is tolled as a result of its failure to report to the trust beneficiary. It will be interesting to see just how many professional trustees will be willing to serve as the fiduciary of a silent trust.