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

2-Sep-21

Silent Trusts – Again!

Take-Away: Michigan’s Probate and Estate Planning Council is currently studying a recommendation to change the Michigan Trust Code to permit silent or quiet trusts. If that proposal becomes the law, silent trusts should nonetheless be used sparingly.

Background: The common law imposes on trustees the fiduciary duty to report and account to trust beneficiaries in order to enable those trust beneficiaries to protect their interests in the trust. [Restatement (Third) of Trusts, Section 82(1).] The Michigan Trust Code requires a trustee to administer a trust expeditiously, in accordance with its terms and purposes, and for the benefit of the trust beneficiaries. [MCL 700.7801.]

  • Existence of Trust: One of the critical duties of a trustee is the duty to inform and report to trust beneficiaries, including the duty to keep the trust beneficiaries reasonably informed about the administration of the trust and of the material facts necessary for those beneficiaries to protect their interests in the trust, e.g. “a trustee shall promptly respond to a trust beneficiary’s request for information related to the administration of the trust.” [MCL 700.7814(1).] This fiduciary duty encompasses: (i) promptly furnishing to the trust beneficiary a copy of the terms of the trust that describe or affect the trust beneficiary’s interest and “relevant information about the trust property.” [MCL 700.7814(2)(a).]
  • Annual Accounts: In addition, the trustee’s duty includes the responsibility to send to the distributees, or permissible distributees of trust income or principal, and to other qualified or nonqualified trust beneficiaries who request it, at least annually a report of the trust property, liabilities, receipts, disbursements, and “a listing of trust property and, if feasible, their respective market values.” [MCL 700.7814(3).]
  • Not a Default Rule: The duty to provide trust beneficiaries with the terms of the trust and information about the trust’s property, and to notify qualified trust beneficiaries of an irrevocable trust of the existence of the trust and the identity of the trustee is one of those fiduciary duties that cannot be eliminated by the settlor of the trust. [MCL 700.7105(2)(i).] However, the terms of the trust can direct that annual accounts and information be provided to less than all of the qualified trust beneficiaries, unless a probate judge orders that information be provided, notwithstanding what the trust instrument provides. [MCL 700.7814(4).]

Interestingly, in the 10+ years that we have had the Michigan Trust Code, not that much litigation has centered upon the trustee’s duty to inform and report, or the scope of the trustee’s reporting. The Court of Appeals has held that no particular form for a report or accounting is required of the trust. A few appellate cases focused upon trust beneficiary claims that the trustee had a duty to report actions taken with respect to the trust and its assets while the trust was revocable, i.e. the settlor was alive but incompetent. In those cases the appellate court has declined to hold that the trustee’s duty to inform extends ‘back’ to a time when the beneficiaries were, not yet, qualified trust beneficiaries. [In re Estate of Poston, No. 331772, July 25, 2017; In re Massie Family Trust, No. 326069, May 19, 2016.]

If Michigan were to adopt a silent or quiet trust authorization, that change would dramatically affect a trustee’s duty to report, account, or promptly respond to a trust beneficiary’s request for information related to the administration of the trust.

Other States: To date, several  states permit silent or quiet trusts: Alaska, New Hampshire, Nevada, Ohio, Tennessee, and Wyoming. Delaware’s statutes have authorized silent trust’s for the longest period of time, and Delaware’s statutory scheme is perceived to be the most liberal. [12 Del Ch. 3303-3339 As a broad generalization, these state statutes do not impose any limit on the length of time that the trust remains ‘silent’ with regard to some, or all, of its beneficiaries; Delaware’s statute permits a trust to be silent for a reasonable period. [12 Del Ch. 3303(c).]

  • Duration of Quiet Period: Normally the statutes anticipate that an event or age will be reached when the trust ceases to remain silent, and information is then provided to the trust beneficiaries as a matter of right. Examples of those ‘events’ include: (i) the beneficiary attains a specified age; (ii) the settlor’s death; (iii) a specified date far into the future; or (iv) the occurrence of an event, such as the death of the beneficiary’s parents.
  • Designated Representative: These statutes usually require the use of a designated representative, who serves as a presumed fiduciary to bind the beneficiary in judicial or nonjudicial proceedings. In addition, the statutes give to the designated representative, the legal right and standing to initiate legal proceedings on the beneficiary’s behalf, including the right to review and approval annual accountings provided by the trustee. This is significant since a trustee will be reluctant to serve as trustee of a silent trust if the trust beneficiary can, years after the trust’s administration commenced, sue the trustee for breach of trust for decisions that were disclosed on the trustee’s annual accounting. The consent of the designated representative to those annual accountings will start the statute of limitations running on claims against the trustee that could have been brought due to disclosures made in the annual accountings.
  • Continuing Fiduciary Duties: Despite being relieved (for some duration) of its fiduciary duty to inform and report to trust beneficiaries, even under these statutes the trustee continues to have its fiduciary duties of loyalty, impartiality, and diligence with regard to the administration of the trust.

Practicalities: With a silent trust, the beneficiary is presumably kept in the dark for some period of time- sort of. But that tends to be more aspirational when confronted with reality.

  • Other Trust Beneficiaries: While the trustee may have the responsibility to maintain the trust a secret from some trust beneficiaries, other beneficiaries of the trust are not obliged to keep the trust a secret, and there is nothing that prohibits those ‘other’ trust beneficiaries from talking about the trust or sharing copies of their annual accountings.
  • Discretionary Distributions: If the trust instrument calls for discretionary distributions to, or on behalf of, trust beneficiaries and the trustee exercises that discretion, the existence of the trust will not remain a ‘secret’ for very long. The beneficiary will receive a distribution which may trigger obvious questions; the trustee will not have to answer the beneficiary’s questions- the beneficiary can ask, but the trustee won’t tell. That scenario sets up considerable distrust in the trustee-beneficiary relationship.
  • Tax Reporting: Similarly, even if the trustee makes a discretionary distribution on behalf of the trust beneficiary (e.g. “the trustee may distribute trust income or trust principal, or both to or for the benefit of the trust beneficiary”), the trust beneficiary will still receive tax reporting statements at the end of the year with regard to the distribution made on their behalf, to the extent that the distribution from the trust carries out distributable net income (DNI.) That situation will come as a surprise to the trust beneficiary- the beneficiary is given a K-1 by the trustee at the end of the calendar year on which they will have to pay income taxes, yet they never saw the distribution when arguably they did not even know that the trust existed.
  • Beneficiary Disclosures: The beneficiary of a silent trust may be forced in their own life experiences to make disclosures of their wealth, or their potential access to wealth, under oath. Consider the full disclosure requirements for any valid prenuptial agreement that a beneficiary planning to marry must make. Or, the beneficiary’s need to file a financial statement in conjunction with a bank loan application. Does the trustee sit by idly and let the beneficiary complete those disclosures, under oath, knowing that the disclosure is inaccurate?
  • Trust Inconsistencies: How does the trustee keep the existence of the trust a secret if the trust instrument contemplates annual exclusion gifts to it with the corresponding obligation to give to the trust beneficiary Crummey notices? Or, how does the trust remain a secret what if the trust beneficiary is given an annual $5,000 or 5% withdrawal right? Settlors often stress the tax benefits of an irrevocable trust, but those perceived tax benefits are inconsistent with the settlor’s desire to maintain a quiet trust.
  • Trust as Teaching Tool: Many settlors intend that the trust that they establish for their children or grandchildren will function as a teaching tool, where the trustee uses distributions and perhaps restrictions imposed on distributions, to teach the beneficiary the responsibilities of wealth, and how to intelligently invest that wealth. This education, if commenced at an early age, is far more likely to have a positive impact on the beneficiary when the wealth is finally made available to the beneficiary. A silent trust merely shields the beneficiary from reality and delays whatever ‘teaching’ opportunities that the trust can otherwise provide to the trust beneficiary.
  • Recording Keeping: The trustee will be obliged to maintain records for a substantial period of time if the statute of limitations is tolled while the trust beneficiary is unaware of the trust and the beneficiary’s ability to protect their interests under the trust until the time or event where the beneficiary is advised of the trust’s existence. Since the time in which to file claims against the trustee for breach of trust could potentially be extended for decades the trustee will have to maintain all of its records for that extended period.

Conclusion: It is understandable why settlors may fear that a trust beneficiary’s knowledge of wealth held in trust for their benefit may act as a disincentive for the beneficiary to achieve their own success in life. Yet the practicalities of trust administration suggest that the goal of maintaining a truly silent trust may be more of an illusion than reality. So, while the Michigan Legislature takes a close look at the adoption of silent trust enabling legislation, hopefully settlors will also consider the benefits of a trust beneficiary actually working with the trustee to gain knowledge and experience in responsibly managing that wealth.