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George F. Bearup, J.D. Senior Legal Trust Advisor

19-Dec-16

Silent Trusts

The Legislative Development and Drafting Committee of the Michigan Probate and Estate Planning Council is currently looking at a possible amendment to the Michigan Trust Code to permit ‘silent trusts’ or what I call a ‘hush trust.’

Many clients would prefer to not have the beneficiaries of Trusts that they create know about the Trust or the size of the Trust’s corpus. Their reasoning is that if the beneficiary becomes aware of the Trust established for his/her benefit, that knowledge might lead to a lack of motivation or dissolute living by the trust beneficiary. Other reasons sometimes also offered for the use of a silent trust, including: (i) asset protection, as there is less chance of a frivolous lawsuit if neither the beneficiary, nor the beneficiary’s friends are aware that the Trust exists; (ii) protect the beneficiary from identity theft; (iii) protect the beneficiary from kidnapping; (iv) protect the beneficiary from himself if he has drug or emotional problems; and (v) protect closely held family businesses when non-voting interests are transferred to the Trust and the patriarch, who retains the voting interests,  prefers to not discuss the business or its operation with the trust beneficiaries

The question of silent trusts originally came up when the Michigan Trust Code was drafted. After strong opposition to silent trusts voiced by the Michigan Probate Judges Association, the final version of the Michigan Trust Code requires formal knowledge of the  existence of the Trust given by the trustee to trust beneficiaries, as reflected in MCL 700.7814, Duty to Inform and Report –A trustee shall keep the qualified trust beneficiaries reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. Unless unreasonable under the circumstances, a trustee shall promptly respond to a trust beneficiary’s request for information related to the administration of the trust. MCL 700.7814(1)

The statue then identifies how the trustee fulfills this responsibility, by:

  • Promptly furnishing to the trust beneficiary [note not limited just to qualified trust beneficiaries] a copy of the terms of the Trust that described or affect that beneficiary’s interest and relevant information about the trust property;
  • Within 63 days notify  the qualified trust beneficiary if the Trust is registered, and if so where registered,  and of the trustee’s name, address and telephone number; and
  • Within that same 63 days notify the qualified trust beneficiary of the Trust’s existence, the identity of the settlor, and their right to request a copy  of the terms of the Trust that describe or affect the trust beneficiary’s interests under the Trust. MCL 700.7814(2)

Fifteen states currently have some form of quiet trust legislation, notably Florida, Arizona, Ohio, and Delaware, but there is a wide variety of methods used by those state statutes  to accomplish the objective to keep knowledge of the existence of a Trust from its beneficiaries. For example, South Dakota’s Trust Code eliminates the notice requirement to a minor child-beneficiary by providing that a beneficiary below age 21 is not entitled to information about a Trust for that child-beneficiary unless otherwise required by the trust instrument. [Note, the Uniform Trust Code relieves a trustee of any notice requirements to a beneficiary until the beneficiary is age 25 years, UTC 105(b)(8)]. Other states permit the trustee to provide notice and accountings to a designated surrogate to receive that information on behalf of the trust beneficiaries. Yet other state trust codes permit a trust protector to waive or modify any notice to be given to the trust beneficiaries, which discretion permits a trust protector to give notice to some, but not all, of the trust beneficiaries.

It is not clear if the Drafting Committee will recommend a silent trust amendment to the Michigan Trust Code, nor if the Council will recommend that change to the existing MCL 700.7814 with proposed legislation. And even if the proposed Trust Code amendment gets that far, there is no reason to believe that the Michigan Probate Judges Association will sit idly by when it was so vocal in opposition to the use of silent trusts just 6 years ago. But it is something that we need to closely watch in the year to come as the Probate Council identifies several other proposed changes to the Michigan Trust Code, in additional to the prospect of a formal authorization of silent trusts in Michigan.