Independent Thinking®
Buying Time with a Delaware Silent Trust
July 21, 2016
Becoming a parent has been likened to deciding forever to have your heart go walking around outside your body. While parents of all backgrounds share many of the same anxieties, affluent parents often worry that their wealth could harm their children, affecting their drive, their sense of accomplishment, and their relationships.
Thoughtful discussions, between parents, among families, and with wealth and fiduciary advisors, form the starting point in preparing children for inheritance. For some parents, the first question is: Do my children have to know that they have a trust? The answer in most cases is yes, and generally for good reason. In most states, trustees are required to provide trust beneficiaries or their guardians with information about the trust, including its nature and amount, on the beneficiary’s request.
News from Delaware
In July 2016, the Delaware legislature made it easier for trustors and beneficiaries to amend irrevocable trusts, provided that the modification does not violate a material purpose of the trust.
S.B. 248 provides that trust modifications made by non-judicial settlement agreement are no longer required to be of the type that would be approved by the Chancery Court, if they were brought before the court. This is a significant move that expands opportunities to modify trusts beyond decanting and merger. The proposed law also allows an irrevocable trust to be modified while the trustor is still living.
We’ll be writing more about this decision and the implications for families and their advisors in future issues of Independent Thinking.
In Delaware, however, families have the option of a silent trust, which allows for a period of time in which the beneficiary of the trust is not informed of its existence. For some parents and grandparents, this time, known as the quiet period, can provide peace of mind. The child can develop independence and self-reliance, unencumbered by the temptations and responsibilities of wealth. Silent trusts can also buy time for the older generations to prepare themselves and the child for discussions around wealth. Educating a new generation about income streams, asset allocations, and management of risk can serve to increase awareness, so that the news of the trust does not come as a shock.
Recent Delaware legislation provides families with options to tie the silent period to any one (or a combination of) specific milestones. These include: the age of the beneficiary; the lifetime of the trustor or his or her spouse; a term of years or a specific date; or an event that is certain to occur, such as the tenth anniversary of the trustor’s death. (Tying a trust to a child’s marriage makes for amusing Hollywood plot lines but isn’t actually a staple of estate planning.)
The interests of the beneficiary during the quiet period can be managed by a designated representative, named in the trust document by the trustor. He or she receives account statements and can sign consent, release, and indemnification agreements that are binding upon the represented beneficiary. This representative can also initiate a court or administrative proceeding on behalf of the beneficiary.
It’s important to note that the statute does require that the event be certain to occur. There’s no case law on this yet (it was only enacted in August 2015), but the quiet period does have to be perceived by a court as reasonable.
Silent trusts are just one of the many advantages of having a trust in Delaware. Other advantages include the absence of income tax on trusts (without Delaware-domiciled beneficiaries), asset protection, and flexibility in modifying certain types of trusts through decanting, merger, or non-judicial settlement agreements.
Every family is different, and circumstances can change. Your wealth advisors are able to help you determine if establishing a silent trust, modifying the conditions of an existing trust to tie a quiet period to one or more events, or establishing another type of Delaware trust is the right choice for your family.
For information on Evercore Wealth Management’s family wealth services and our September 20 event, Shaping the Financial Conversation with Your Family, with nonprofit consultant Sharna Goldseker in New York, please contact your wealth advisor.