One of the biggest concerns that parents have when leaving substantial assets to the next generation is that if a child knows or expects that they will receive those assets in the future, it may stifle the child’s ambition to set their own course in life.
Parents are often worried that their children will instead look to rely on the wealth that the parents accumulate and become a so-called “trust fund baby.”
One way to combat this issue is by creating an undisclosed trust, also referred to as a “quiet trust.” In creating a quiet trust, parents can include provisions that permit the trustee to limit or even eliminate the amount of information that a trust beneficiary receives. The information a trust may choose to withhold could include, for example, the assets that the trust holds, the income generated by trust assets, and when a beneficiary may be entitled to distributions from the trust. The thought in creating a quiet trust is that if a beneficiary is unaware of the existence of a trust, they will be more likely to get a college degree or otherwise advance their careers and not rely on trust distributions to fund their lifestyle.
Until recently, parents residing in Michigan had to rely on the laws of other states to combat this issue by creating quiet trusts in other jurisdictions. Of course, creating such a trust outside Michigan often results in more complexity on many fronts – from tax matters to administration issues – likely leading to additional expense and headache.
Effective February 2024, as part of the EPIC Omnibus Legislation, Michigan now authorizes the use of quiet trusts. While the reasons set forth above may be important for the creation of quiet trusts, their usefulness is not limited to those issues. Other reasons for creating quiet trusts may include creditor protection, protecting a beneficiary from potential claims of ex-spouses, or keeping any unequal treatment among beneficiaries private.
While at first glance quiet trusts may seem like a proverbial “no-brainer,” they are not without potential pitfalls and are not a panacea to all issues that a child may face as a recipient of their family’s wealth. As with most estate planning techniques, the devil is in the details. The creation of a quiet trust should be approached on a case-by-case basis and discussed with competent counsel.
