Silent Trusts: One of Delaware’s Best Kept Secrets
October 5, 2017
By: Kara Rademacher
Delaware has long been a preferred trust jurisdiction because of its allowance of directed and perpetual trusts, its asset protection laws, and its favorable tax treatment of trust income. In recent years "silent trusts" have also become a very attractive feature of Delaware law and recent modifications to the law have clarified how these trusts are to operate.
Under the Delaware Trust Act of 2015, a silent trust is one in which beneficiaries need not be informed of the existence of the trust by the trustee for a period of time that can be tied to the beneficiary's age, the lifetime of the grantor or the grantor's spouse, a term of years, a specific date or a specific event that is certain to occur. The Act specifies that any time a governing instrument restricts or eliminates the right of a beneficiary to be informed of his or her interest in a trust, a "designated representative" (who may be appointed by the grantor) may represent the beneficiary for purposes of any judicial proceeding or non-judicial matter. Significantly, non-judicial matters include granting a consent, release or ratification, or receiving a report for purposes of measuring the statute of limitations period. Thus, a designated representative is explicitly authorized to sign consent, release and indemnification agreements that are binding on the represented beneficiaries and to receive account statements on behalf of such beneficiaries. A designated representative may also initiate a proceeding in court on behalf of the represented beneficiaries – without the beneficiaries ever being informed of the existence of the trust.
The ability to establish a silent trust may be appealing to grantors who, for various reasons, do not yet want the beneficiaries to be informed of the existence of a trust for their benefit. Examples of reasons why a grantor may not want beneficiaries to be aware of a trust are:
· To promote fiscal and social responsibility among the beneficiaries, which may be negatively affected if a beneficiary has knowledge of a large trust;
· If the trust is funded with family business interests, to conceal the direction or operation of the business, particularly from younger beneficiaries or beneficiaries who are not involved in the business; and
· To keep information about the trust and trust assets from the beneficiaries' creditors, including ex-spouses.
Taken in combination with other provisions of Delaware trust law, grantors can now preserve privacy, in addition to their other estate planning and asset protection goals.