Many reasons for a client not wanting to tell their children about a trust center around delaying addressing the issue rather than dealing with it and involving the children in the discussion. The following ideas are helpful to share with our clients when they’re deciding whether to create a quiet trust, that is, a trust that permits keeping the existence of the trust or information about the trust from the beneficiaries, and if so, for what period of time the trust will be quiet.
Research shows that nearly 70% of wealth transfers fail by the third generation, with “failed” defined as the receiving generation losing control of the funds. Generally, this isn’t due to poor wealth planning or poor investing, but to a lack of trust, transparency and, on the part of the succeeding generation, lack of preparedness. So before thinking about quiet trusts, it makes sense for the client to take a look at the larger picture of family governance and prepare their children for the wealth they’ll ultimately receive. I’m suggesting that rather than thinking of the quiet trust as a lifetime substitute for the will, our clients consider involving their children in discussions about the family wealth at appropriate ages for their children. What the appropriate age is really depends on the family, but it’s often earlier than the client is thinking and most likely earlier than on the client’s death.
Modern Vs. Traditional Planning
Drawing on the experience of The Northern Trust Institute, I’m dividing planning for wealth transfer among family members into the categories of traditional planning and modern planning. In traditional planning, the client and their attorney would handle the estate documents, such as the will and any trusts. In modern planning, this process would include the client modeling financial behavior for their children and looking for teachable moments to help their children learn about financial decision making. This would also include creating a Statement of Wealth Transfer Intent, which clearly explains the purpose of the client’s estate plan as guidance for family members and fiduciaries working with the family members.
In traditional planning, financial education is linked to disclosure of the family wealth and financial assets. This disclosure is delayed until the parents think that their children are ready or need to know. The risk is that financial literacy for the children is left to chance, rather than being carefully planned and coordinated. In modern planning, financial literacy and financial disclosure don’t necessarily have to be linked from the beginning. But getting the financial literacy process started keeps the children from “learning on the job” only after they inherit the wealth.
Family engagement in traditional planning is often limited to those family members who are chosen to be involved in the family business or help manage the assets that have created the family’s wealth. This is an all-consuming endeavor for some of the family members, while other family members are left out. Compare this to modern planning, which suggests that the parents broaden the path to engagement by inviting all adult family members to co-create a cornerstone statement that’s a long-term vision of success. You don’t have to be in the family business to be a part of the family’s business.
Traditional planning may bring to mind a formal reading of the will, which may be the first time that family members learn about the disposition of assets. And it’s done at a time when individuals can be fragile and tensions can run high. The result can be less than optimal. Modern planning suggests that the client shares the details of their estate plan with their family members during lifetime, so the family members can understand the client’s objectives and priorities before there’s a reading of the will. This also includes giving adult family members the information they need to do their own planning. This part of modern planning likely will give some clients pause. This is the opposite of using a quiet trust as a will substitute and keeping the information from those who’ll benefit from the wealth. Succession planning is a corollary. In traditional planning, succession planning often takes place when a succession is imminent or after an unexpected succession. Again, tensions can be high, and disruption is likely. In modern planning, the client engages the whole family and key advisors to objectively identify roles and responsibilities prior to the actual succession event.
The Quiet Trust
Which brings us back to the quiet trust. In traditional planning, the quiet trust is used to prevent beneficiaries from knowing about the trusts and likely to keep knowledge of the overall family wealth from the beneficiaries. Using the concepts of modern planning would include transparent estate planning allowing the family members to have opportunities to prepare for their roles and responsibilities.
The quiet trust is a very effective tool when used to help beneficiaries who might be too young to know about the trust and related wealth or who might not be ready for other reasons discussed above. But when our clients say they want a quiet trust, rather than just getting it done, we should ask the client to consider the concepts described as modern planning. These concepts and quiet trusts aren’t necessarily exclusive to each other. Using quiet trusts as a transitional tool can be a part of modern planning. Or maybe, even with modern planning, there will be one or more beneficiaries who shouldn’t know about the trust for various reasons. In the end, the client has the final say, and they might not be interested in these concepts. However, if we don’t ask them to consider a modern planning approach when contemplating creating a quiet trust, perhaps we’ve left some work undone for the client and their family.
*This article is an abbreviated version of “Considering Quiet Trusts in the Larger Picture of Family Governance,” which appears in the May 2022 issue of Trusts & Estates.