Recently, Michigan added a new section to the trust code, making it possible for trust settlors to create “quiet” or “silent” trusts in Michigan. As the name implies, in a silent trust arrangement, a trustee is not required to disclose information about a trust or its existence to the trust’s beneficiaries during a nondisclosure period of up to 25 years.
Uses for Silent Trusts
Some trust settlors might be thrilled to have the ability to create trusts for tax planning and other purposes and not tell the beneficiaries about them for many years. Settlors facing issues such as these below may find a silent trust useful:
- Young beneficiaries – Beneficiaries could have a greater incentive to achieve and less chance of developing feelings of entitlement if they can’t rely on a trust fund.
- Beneficiaries with behavioral or mental health issues – Knowledge of trust assets could interfere with a beneficiary’s current efforts at treatment and recovery or encourage the beneficiary to challenge the trustee’s actions.
- Beneficiaries with problematic relationships – Where there are concerns that the beneficiary’s relationship or marriage won’t last or is abusive, a quiet trust could protect the trust assets from a divorce or misuse by the problematic partner.
- Beneficiaries with existing or potential creditors – This trust can protect assets where beneficiaries have demonstrated mismanagement of money or have a high potential for creditors, perhaps due to a beneficiary’s gambling addiction or a career that carries a high liability risk. While a well-structured trust can provide this protection regardless of whether the beneficiary knows of the trust, being able to withhold trust information can heighten protection for certain beneficiaries by making it difficult for creditors to discover the trust.
- Beneficiaries who are not treated in an “equal” manner by the estate plan – When the settlor’s estate plan treats each beneficiary differently, perhaps in an unequal division of assets or different distribution standards, allowing more time before this discovery is made can sometimes diffuse emotional reactions and make it more difficult to contest the trust.
- Limiting disclosure during settlor’s lifetime – If a trust settlor is incapacitated, and their trustee and agent under power of attorney are the same person, state law generally requires that the trustee and agent report trust activity to the next line of beneficiaries who receive assets after the settlor’s death. For privacy and other reasons, sometimes the settlor does not want the beneficiaries to know of the trust while the settlor is still alive, and the trust is only to operate for the settlor’s benefit. If the settlor waives this requirement to report, however, the trustee risks continuing potential liability if the trustee can’t report trust information to the beneficiaries. The silent trust rules allow a settlor to limit the information that is provided to the next beneficiaries during settlor’s lifetime, while also allowing the trustee to protect themself in doing so, as described below with the protection powerholder.
Who Receives Information About a Silent Trust?
The new trust laws provide some specifics for silent trusts:
- The trust instrument spells out the information that is not to be disclosed to the beneficiary, such as the trust’s existence or the value of trust assets.
- Unlike some other states, like Florida, the trustee of a Michigan silent trust is not required to produce trust accountings to anyone.
- The trust can, and should, grant to someone a “protection power” so that the “protection powerholder” can direct the trustee and receive trust information, such as accountings, in place of the beneficiary. This person functions as a trust director and is subject to Michigan’s rules that apply to trust directors. A protection powerholder has a fiduciary duty to act in the best interests of the beneficiaries, like a trustee or trust director.
- The trust can also go so far as to give another person, other than the protection powerholder, the right to remove a trustee for failing to honor the trust’s direction not to provide certain information to the beneficiaries.
As wonderful as silent trusts sound, they also have some drawbacks. A silent trust arrangement has a high potential for an inadvertent early disclosure of the trust’s existence, and this can create anger and hurt feelings for beneficiaries. Additionally, this arrangement also creates complexities that trust settlors and trustees should consider before establishing such a trust. We will discuss these in the next Legacy Matters blog post – Issues to Consider Before Creating a Silent Trust.
If you are interested in exploring the use of a silent trust, please contact your Warner estate planning attorney or contact Scott DeWeerd or Raquel Sportel.
