One of the fundamental duties of a trustee is to keep beneficiaries reasonably informed with regard to the trust’s existence and administration. That could be soon changing in Michigan.

The Michigan Trust Code imposes broad disclosure requirements on a trustee. Specifically, the Michigan Trust Code provides that a trustee must keep a qualified trust beneficiary reasonably informed about the trust’s administration and also with respect to the material facts that are necessary to enable the beneficiary to protect his or her interest in the trust. In addition, a trustee must promptly respond to a trust beneficiary’s request for information with regard to the trust’s administration. A qualified trust beneficiary includes both the current beneficiary of the trust (the individual who receives distributions) and the beneficiaries that would be entitled to distributions from the trust if the current trust beneficiary’s interest were to cease (the remainder trust beneficiaries). Consequently, the trustee’s duty to inform extends to both the current trust beneficiary and the presumptive trust remainder beneficiaries.

When a trust becomes irrevocable, the trustee must provide the trust beneficiary with a copy of the trust instrument and also information with regard to the existence of the trust that will alert him or her as to their status as a trust beneficiary. The trustee must also provide periodic account statements to the trust beneficiary. The trustee’s obligation to inform and regularly communicate with the trust beneficiaries cannot be eliminated from a trust instrument under Michigan’s Trust Code. As a result, Michigan is considered to be a jurisdiction that does not permit quiet trusts where trust beneficiaries are “kept in the dark” about the trust, its property, and their rights under the trust.

These fiduciary disclosure rules sometimes can frustrate the trust’s creator. A trust creator may fear that a trust beneficiary’s knowledge of the wealth held in the trust can act as a disincentive for the beneficiary to pursue his or her own success, which often is the case when the trustee holds substantial assets for a beneficiary. For example, if there is a young adult trust beneficiary, or a beneficiary with a known substance abuse or gambling problem, the trust creator may not want the beneficiary to know about the trust, its assets, or the income those trust assets generate, all for a good reason.

Some states, like Delaware, have adopted laws that permit a trust instrument to eliminate the trustee’s duty to inform the beneficiaries for a period of time, a period often tied to the trust beneficiary’s age, the beneficiary’s parent’s death, trust creator’s death, or the occurrence of some other external event, e.g. the sale of the family business held in the trust. Currently the State Bar of Michigan has a group that is studying a possible amendment to the Michigan Trust Code that would permit some type of quiet trust.

The perceived advantages of a quiet trust include the following:

  • It maintains confidentiality with regard to the trust creator’s financial affairs and estate planning arrangements;
  • It avoids the beneficiary’s scrutiny of the trustee’s investments and management of trust assets;
  • It prevents the disclosure of information about the trustee’s management of trust assets and, in particular, any family-owned businesses held in the name of the trust;
  • It incents the beneficiary to behave in a financially responsible manner; and
  • It protects the beneficiary from becoming the target of fraud, identity theft, and manipulation by others.

The drawbacks to a quiet trust are often viewed to be the following:

  • It defeats a key purpose of keeping trust beneficiary informed so that they can monitor the trustee and ensure that the trustee acts in the beneficiary’s best interests;
  • If the trust beneficiary does not know about the trust or cannot obtain information about the trust, it may be impossible for the beneficiary to hold the trustee accountable;
  • Without contemporaneous information about the trustee’s decisions in the administration of the trust, it increases the risks of litigation at a later date when the trust beneficiary finally learns of the trustee’s decisions, albeit long after the decisions have been made;
  • Its presence, standing alone, may not be effective to discourage irresponsible or destructive behaviors by the trust beneficiary;
  • The failure to explain the details of wealth held in the trust might hurt feelings of the trust beneficiary and could lead to litigation disputes in later years; and
  • Even when “kept in the dark” by a quiet trust, an adult beneficiary usually has an inherent sense of his or her family’s wealth.

A quiet trust can frustrate its trustee for several reasons. First, the statute of limitations to prevent the beneficiary’s claims against the trustee for breach of trust will not start to ‘run’ if the beneficiary is uninformed of the trust or its administration. Second, on occasion the trustee will want to engage the trust beneficiary in a ‘non-judicial settlement agreement’ [which is authorized under the Michigan Trust Code] to alter the trust’s administration; that flexible remedy, without having to go to the probate court asking permission, is unavailable if the beneficiary cannot sign the agreement because the beneficiary does not even know the trust exists. Third, if the trustee needs to decant the trust assets to a new trust to address tax and property law problems, yet another remedy under the Michigan Trust Code, the beneficiary cannot consent to the trustee’s decanting when the trust beneficiary does not know about the trust. Finally, keeping the beneficiary informed promotes better trustee-beneficiary relationships, which reduces the likelihood that a beneficiary will complain about the trustee by filing a probate court petition. A trustee with common sense knows that when you deliberately keep someone ‘in the dark,’ the normal assumption is that someone is hiding something and is up to no good.

One solution that some states with quiet trusts have adopted to address many of the negatives associated with a quiet trust is to name a designated representative to ‘stand in the shoes’ of the trust beneficiary, who will receive disclosures from and hold the trustee accountable. The designated representative can represent and bind the beneficiary who they represent for purposes of receiving notices, accountings and the type of information that is required for a non-judicial settlement agreement or consent to a trust decanting. This option of using a designated representative provides the benefit of disclosure by the trustee while fulfilling the trust creator’s goal to keep information about the trust and its finances away from the beneficiary. One unanswered question is whether a designated representative who receives communications from the trustee on behalf of the trust beneficiary serves in a fiduciary capacity.

It is too soon to say if Michigan will sometime soon permit quiet trusts. If the Michigan Trust Code is amended to authorize their use, serious thought needs to go into whether an existing trust should be modified or amended to add that as a feature, or if new trusts that are created will embrace the quiet trust concept. There are plenty of reasons both for, and against, a quiet trust.