Bar News - March 22, 2017
Elder, Estate Planning & Probate Law: What [the Beneficiary] Don’t Know, Won’t Hurt Her
By: Patrick Collins
Quiet Trusts: Practical Drafting Considerations
In light of their uncertainty, both from a legal and practical standpoint, below are five suggested considerations when drafting a quiet trust:
1. Consider available alternatives to achieve the settlor’s goals before drafting a quiet trust. For example, a fully discretionary trust providing only a mere expectancy to a beneficiary may suffice.
2. Consider limiting the quiet period only for so long as the beneficiary is not receiving trust distributions. Once a beneficiary receives a distribution, the trust should become “loud” as to that beneficiary.
3. Consider appointing a trust protector to represent the beneficiaries of the quiet trust. Under RSA 564-B:12-1201(a)(4), a trust protector has the “power to review and approve a trustee’s trust report or accounting.” In addition, under RSA 564-B:12-1201(b), “to the extent that a trust protector exercises a power in accordance with the terms of the trust, the trust protector’s action is binding upon all other persons.”
4. Consider a stand-alone, separate trust that is not the recipient of distributions from a pour-over will and does not own an interest in real estate. A curious child who reads a pour-over will or scours the registry of deeds will inevitably discover the existence of the trust. Once the beneficiary learns of the trust and inquires about its terms and assets, a trustee is put in the difficult position of balancing his or her duty to act in good faith (i.e., not lie to the beneficiary) and his or her duty to carry out the wishes of the settlor. A standalone trust, not referenced in any other public document, may help avoid that issue.
5. Consider having the traditional “loud” estate planning revocable trust receive a good portion of the client’s assets. It would be naďve to think that children of clients are unaware of the fact that mom and dad have wealth. If, on their deaths, all of the money seemingly disappears, a child is going to ask questions, likely out of fear that someone took advantage of mom and dad.
In the movie The Waterboy, Kathy Bates plays a controlling mother adamant that her son (played by Adam Sandler) not play football. Henry Winkler, as the football coach, convinces Sandler’s character to play any way, telling him: “What momma don’t know, won’t hurt her.”
Quiet trusts are grounded in the same idea. No parent wants to create a spoiled, unproductive beneficiary, dependent on an inheritance. One option available to settlors of New Hampshire trusts is to create a “quiet” trust that keeps beneficiaries uninformed about the existence, terms and assets of irrevocable trusts. The purpose of this article is to review the authority for quiet trusts in New Hampshire, discuss the controversy surrounding them, and offer some practical drafting considerations.
Mandatory vs. Default Rules
While the duty to keep beneficiaries reasonably informed about the administration of a trust is a “fundamental duty of a trustee” (see Comments to Section 105 of the Uniform Trust Code), the New Hampshire Trust Code (NHTC) allows settlors to modify or eliminate a trustee’s duty to inform and report to beneficiaries.
The NHTC includes 17 mandatory provisions. The remaining provisions (so-called “default rules”) can be overridden by the express terms of a trust. RSA 564-B:8-813 provides that a trustee shall provide a report, at least annually and at the termination of the trust, to the permissible distributees of trust income or principal, and shall notify the qualified beneficiaries who have attained 21 years of age of the trust’s existence, of the right to request a copy of the trust instrument, and of the right to a trustee’s report. Quiet trusts derive from the fact that RSA 564-B:8-813 is a default rule that can be modified or eliminated in a New Hampshire trust.
Validity of Quiet Trusts
While quiet trusts are permitted under the NHTC (as well as trust codes of many other states), notable legal scholars have questioned their validity. Yale Law School Professor John Langbein suggests that “like a trust term purporting to abrogate all fiduciary duties, or a term authorizing the trustee to act in bad faith, a term that prevents the beneficiary from obtaining the information needed to enforce the trust entails the risk of making the trust unenforceable and hence illusory.” (“Mandatory Rules in the Law of Trusts,” 2004).
Similarly, Suffolk Law School Professor Charles Rounds Jr. describes quiet trusts as a “radical divergence from traditional trust principles.” (“Loring and Rounds: A Trustee’s Handbook,” 2017 ed.) Further, University of Connecticut School of Law Professor Robert Whitman recites actual examples of “trust beneficiaries who, when denied disclosure, contacted the Internal Revenue Service to report suspected tax evasion and sought redress from their state’s attorney general, the Securities Exchange Commission, the Federal Bureau of Investigation, the Central Intelligence Agency, the police and newspapers,” and notes that while such actions may not be successful, “the fallout from non-disclosure is costly, both emotionally and financially” (“Full Disclosure Is Best,” 2004).
The New Hampshire Supreme Court has yet to decide a case specifically dealing with quiet trusts, or generally with the duty to inform and report under RSA 564-B:8-813.
Because it is impossible to predict how a court may decide such cases, it is prudent to tread carefully. Among other things, be sure to discuss the risks involved in creating quiet trusts with clients and carefully document those conversations.
As cautioned Judge Learned Hand in Stix v. CIR (Second Circuit, 1945): “no language, however strong, will entirely remove any power held in trust from the reach of a court of equity.”
Patrick Collins is an associate in Pierce Atwood’s Trusts and Estates group and works out of their Portsmouth, NH, office.