Posted On: February 2nd 2017
Abstract: Worried that the prospect of a large inheritance might harm their children’s work ethic, some people establish “quiet trusts,” also known as “silent trusts.” In other words, they leave significant sums in trust for their children; they just don’t tell them about it. Below we list several disadvantages of this approach. It can be argued that an “incentive trust,” which is known to the beneficiaries and which specifies conditions they must meet to be eligible for distributions, can do a better job of encouraging a sense of responsibility.
When planning their estates, many affluent people agonize over the impact their wealth might have on their children. Bill Gates famously said, “I won’t leave a lot of money to my heirs because I don’t think it would be good for them.”
Even parents of more modest means worry about how the prospect of a large inheritance might affect their kids. Is it a disincentive to staying in school, working or otherwise becoming productive members of society?
To address these concerns, some people establish “quiet trusts,” also known as “silent trusts.” In other words, they leave significant sums in trust for their children; they just don’t tell them about it. An interesting approach, but is it effective?
Many states permit quiet trusts, but arguably the risks associated with them outweigh the potential benefits. For one thing, it’s difficult, if not impossible, to keep your wealth a secret. If you live an affluent lifestyle, it’s likely that your children expect to share the wealth some day, and using a quiet trust won’t change that. 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.
Another disadvantage is that a quiet trust may send the wrong message. Once your children discover the trust’s existence, they may interpret your failure to disclose it as reflecting a lack of trust or a lack of faith in their ability to lead productive lives.
A quiet trust may also increase the risk of litigation. The trustee 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 that they disagree with.
The idea behind a quiet trust is to avoid disincentives to responsible behavior. However, it’s not clear that such a trust will actually accomplish that goal. A better approach is to design a trust that provides incentives to behave responsibly, sometimes referred to as an “incentive trust.”
For example, the trust might condition distributions on behavior you wish to encourage, such as obtaining a college or graduate degree, maintaining gainful employment, pursuing worthy volunteer activities, or avoiding alcohol or substance abuse. One drawback to setting specific goals is that it may penalize a beneficiary who chooses an alternative, albeit responsible, lifestyle, a stay-at-home parent, for example. To build some flexibility into the trust, you might establish general principles for distributing trust funds to beneficiaries who behave responsibly, but give the trustee broad discretion to apply these principles on a case-by-case basis.
Perhaps the most important benefit of an incentive trust is that 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, they 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.