What are Silent Trusts?
Silent Trusts serve as a useful legal tool that benefactors can use to protect and regulate access to assets held in trust. Keeping trust beneficiaries unaware of the property or assets coming their way is seen as means to ensure that beneficiaries learn valuable financial lessons by staying independent.
Sometimes we may think the benefactors of a trust can be spoiled, or that they have things too easy. By having quiet or silent trusts this can help to avoid the benefactor becoming one of these
“trust fund babies”,
What is a Silent Trust?
A potential problem of having a trust fund is that the benefactors, who are often children, know that they have money to inherit. It's possible to find stories of youngsters waiting to become eligible to access their trust fund money, and then living a destructive lifestyle and squandering it all.
Getting too much too soon can lead to issues such as a substance abuse problem, gambling, reckless spending or the abandoning of their education.
Many former trust babies have also gone on record to state that they wished they didn’t know about their wealth. They have also stated that they could have done better without knowing the money they would get.
A silent trust helps solve these problems, as it is a trust created without the beneficiary’s knowledge. It is like other trusts in all other aspects. Silent trusts can hold various assets like personal effects, shares, property and even life insurance benefits.
A silent trust waives the trustee’s necessity of letting the beneficiaries know about the trust for some time. The standard trust document usually specifies what is happening in the trust and requires the trustees to inform the trust beneficiary. A silent trust only informs its beneficiaries after a specified event has occurred. This event can be the death of the trust maker (parent), the beneficiary turning an age specified in the trust, or the death of the beneficiary’s parent.
While silent trusts are commonly used in wealthier families, they can be used by anyone that wants to set aside any type of assets for their intended beneficiary.
Advantages of Using Silent Trusts
The main motivation to use silent trusts is so that the children of the trustee don’t grow up with an built-in sense of being privileged or better than others.
The objective is that children grow up more financially responsible and become more well-rounded people if they think that money is limited.
This motivates them to work hard for it and hopefully behave with more financial responsibility and common sense than others that believe themselves to be financially privileged.
Good financial habits that develop in such children should theoretically allow the beneficiaries to manage their trusts better once they get access to them.
Another reason for establishing such trusts is for tax and probate benefits. Silent Trusts keep assets listed under them away from Probate, therefore reducing estate taxes and costs. They can help reduce overall inheritance taxes if they are set up correctly and they also offer advantages such as delaying income taxes for the beneficiaries.
Disadvantages of Using Silent Trusts
The benefactor, often a child, will know that they are going to receive something simply due to the fact that the trust exists. In a conventional trust this means they can be involved in financial planning and discussions, and start to learn good financial management.
If the child is in the dark about a trust, they may miss out on learning this valuable life skill and it possibly could make the child unable to handle the sudden wealth.
They may make poor choices which can lead to resentment or regret in their life. Resentment towards the parents can occur as the children can feel that they are not considered responsible enough to know about their wealth.
Establishing a Silent Trust
Before deciding whether to go for a Silent Trust, you need to evaluate your finances and know which assets you are keeping in the trust and how you will manage without them in the future.
Some rules for setting up Silent Trusts can vary from state to state. However, the general rules are similar. Trusts are legal entities and need to be made formally and legally. The paperwork usually needs to be notarized or registered.
Many people opt to have a trustee or manager take care of all trust matters instead of doing it themselves. In the case of a trust manager or trustee, the title of the trust assets needs to be transferred to the trustee. The whole process can take some weeks to formalize.
Limited States Permit Silent Trusts
In the US, the only states that allow silent trusts are Alaska, Delaware, New Hampshire, Nevada, South Dakota and Wyoming.
Thirty one other states have laws that mandate the trustee to inform the trust's beneficiary about its existence. But this can be delayed by the grantor (trust maker) until the beneficiaries reach the age of 25.
You can work around this, and establish a trust established in a state that allows silent trusts. However, the trustee needs to be in that state for the trust to be established. Many grantors use the services of trust companies. These companies act as trustees in exchange for an annual fee.
While creating a trust, you can assign a family member to act as a trust protector for your trust. The role can be assigned to anyone you deem trustworthy enough to manage the trustee and the trust.
These trust protectors have the power to change or remove the trustee if they are not satisfied with the management. They can also reassign distributions to the beneficiaries.
Be aware that your lawyer would probably not have a license to practice law in the state where the trust is established. You will have to hire an attorney for the state to review and establish the trust. This can add to your overall costs but should pay off in the long run.
After learning about a Silent Trust,you can also take a look at Private Purpose Trust Fund and What is a Conduit Trust?