July 01, 2013

Quiet Trusts: When Do the Ethics Rules Apply to Lawyers Not Acting as Lawyers?

Jay A. Soled

A new kind of trust is beginning to gain traction in the estate planning community. These trusts are known by the moniker “quiet trusts.” These trusts earn this moniker because their terms permit trustees not to disclose their existence to trust beneficiaries. By permitting nondisclosure, trust settlors seek to achieve a simple objective, namely, to keep trust beneficiaries motivated, unaware of their future financial fortunes.

Quiet trusts have not come about by accident. To the contrary, estate planners have had to make a concerted effort to have state legislatures adopt enabling legislation that legalizes quiet trusts. The reason for this legislative push is because there is a long history in common law regarding communication between trustees and trust beneficiaries. More specifically, for reasons pertaining to public policy and oversight, common law has historically required trustees to notify trust beneficiaries of their rights and regularly update them as to the administration of the trust.

But these communication rights concern many trust settlors. Often, trust settlors are fearful that trust beneficiaries, upon learning about the existence of the trust and/or its assets, will lose their personal ambitions and become slothful or indolent. For decades, estate planners have advocated the use of so-called “incentive trusts” designed to help cultivate the ambition of trust beneficiaries; however, many trust settlors often harbor misgivings as to whether incentive trusts are the right solution.

Enter quiet trusts, which are based on the assumption that what trust beneficiaries don’t know can’t hurt them (i.e., can’t sap their personal ambition). As a predicate to their use, state legislatures have had to contravene and overrule common law and its disclosure mandate.

State legislatures have taken several different approaches to the institution of quiet trusts. At the risk of oversimplification, some require disclosure to trust beneficiaries once they become 25 years of age, some do not require disclosure to trust beneficiaries at any time, and some require disclosure to a surrogate trust committee in lieu of the actual trust beneficiaries. What is imperative is that trust settlors, in conjunction with their estate planners, examine what state law permits and then institute trust terms that conform to state law.

Are quiet trusts a panacea that should be routinely used to meet the needs of all clients? The answer to this question is undoubtedly no. However, in the right set of circumstances, a quiet trust may be the perfect solution to meet the needs of the trust settlor and/or the trust beneficiaries.

Jay A. Soled

Jay A. Soled (jsoled@bsrjlaw.com) is a professor at Rutgers University in Newark and the editor of the SLD book, Estate Planning Strategies: A Lawyer’s Guide to Retirement and Lifetime Planning. The information in this article is intended as general information only and should not be acted upon without professional advice.