When planning their estates, many people agonize over the negative impact their wealth might have on their children. To address these concerns, some people would like to establish quiet trusts, also known as silent trusts. In other words, they may leave significant sums in trust for their children; they just don’t tell them about it. An interesting approach, but can we do it in Michigan?
NO. Michigan has a series of statutes that require the Trustee of a Trust to inform and report to beneficiaries. The applicable statutes do not allow the person creating the Trust (the Settlor or Grantor) to direct the non-disclosure of the Trust to "qualified" beneficiaries. Specifically, MCL 700.7105(2)(i) provides in part that "The duty under section 7814(2)(a) to (c) to provide beneficiaries with the terms of the trust and information about the trust's property, and to notify qualified trust beneficiaries of an irrevocable trust of the existence of the trust and the identity of the trustee" cannot be overridden by the Trust Agreement.
A questionable strategy
Many other states (including Alaska, Delaware and Ohio, among others) permit quiet trusts, but the risks associated with them may outweigh the potential benefits. For one thing, it’s difficult — if not impossible — to keep your wealth a secret. Even if your children are unaware of the details of your estate plan, their expectations of a future inheritance can encourage the same irresponsible behavior the quiet trust was intended to avoid.
A quiet trust may also increase the risk of litigation. The trustee of a trust has a fiduciary duty to act in the beneficiaries’ best interests. When your children become aware of the trust years or decades later, they’ll likely seek an accounting from the trustee and, with the help of counsel, may challenge any past decisions of the trustee with which they disagree.
A better alternative
The idea behind a quiet trust is to avoid disincentives to responsible behavior. However, it is not clear that such a trust will actually accomplish that goal. A better approach, and one that may be utilized in Michigan, may be to design a trust that provides incentives to behave responsibly — sometimes referred to as an incentive trust. It provides an opportunity for you or the trustee to help shape the beneficiaries’ future behavior.
With a quiet trust, you keep your beneficiaries’ inheritance a secret and hope that, without the negative influence of future wealth, a beneficiary will behave responsibly. With an incentive trust, on the other hand, you provide positive reinforcement by communicating the terms of the trust, letting beneficiaries know what they must do to receive their rewards, and providing them with the help they need to succeed.
If you would like to explore the possible creation of an incentive trust, please contact us.