Is it ever better for someone to not know about something that’ll benefit them? In some cases, that’s true and it’s the idea of a silent or undisclosed trust.
The Michigan Legislature has adopted a statute that allows a trust to be created which won’t be disclosed to the beneficiary. The law allows a trustee to keep a trust quiet for up to 25 years from the date it became irrevocable. The statute gives a trustee the right to keep quiet the terms of the trust, the amount of assets in the trust, and to prevent a beneficiary from knowing the trust even exists.
This type of trust isn’t appropriate for many people, but there are some important situations it could be very effective in an estate plan. These are some of those circumstances:
1. To avoid disincentivizing a financially immature beneficiary. Parents or grandparents who create a trust for a beneficiary who is young and/or not financially mature yet can be concerned it’ll undermine the beneficiary’s drive or desire to become independent. For wealthy people, this concern has become known as creating a “trust fund baby.” But, this issue is still relevant for someone who has a modest estate. A $250,000 trust could disincentivize a 20-year-old beneficiary from getting the education he would have otherwise gotten or from moving out of the house and getting a job. Not having to disclose this trust to the 20-year-old beneficiary for a period of time may prevent this from happening.
2. To avoid enabling a beneficiary who is struggling with addictions. Establishing a trust for a beneficiary who has addictions is very important, but also very complicated. Having the right to keep it quiet and not communicate it to this beneficiary could be very beneficial. It may help to avoid enabling the beneficiary from further addictive behavior. It may also help to avoid creating an incentive for the beneficiary to get treatment in order to receive an inheritance and then relapse. A silent trust could be an important part of the overall estate plan for a beneficiary with addictions.
3. To avoid communicating an unequal distribution to certain beneficiaries. As a general rule, a trust should have the same terms for the same group of beneficiaries. For example, if a trust provides an outright distribution to three grandchildren, it should not hold back that share for the fourth grandchild unless there’s a very legitimate and objective reason (i.e., the special needs or disability of that grandchild, an addiction issue, etc.). Not treating beneficiaries the same way often creates disfunction or harms the relationship between them. On the other hand, creating a silent trust with different terms for beneficiaries in the same group could be beneficial. It’d allow the trustee to only disclose certain information about the trust when a distribution is made to a particular beneficiary. In doing that, it might limit or even avoid the disfunction that often happens when beneficiaries in a group find out about the trust applies differently to some of them.
