Many clients have expressed a desire to create trusts for loved ones, but to not let the loved one know that the trust exists, or, at a minimum, to not disclose the value of the assets held by the trust or the amount of income generated. I understand the goals typically include not sapping a beneficiary’s drive, protecting a surviving spouse from children’s or step-children’s demands for distributions, and even to protect a beneficiary from himself.
The challenge one faces when attempting to hide trust information from beneficiaries is state law. In Florida, like most other states, a trustee has a duty to annually account to “qualified beneficiaries.” The annual accounting requirements don’t usually apply in revocable trusts until the grantor of the trust dies. When the grantor dies, the trust typically becomes irrevocable and may continue on for a spouse, children or other loved ones. An income, principal or remainder beneficiary of a trust then becomes “qualified” and consequently entitled to receive the trust information.
At that point the trustee, under state law, must provide the beneficiaries a copy of the trust as well as annual information relating to the amount of assets owned by the trust, capital gains and losses realized, income earned, distributions made, expenses paid as well as other “significant items” as defined under the law.
If a trustee fails to provide this information they could be removed for cause, sometimes under the terms of the trust instrument itself if not under state law. Further, the trustee can be held financially liable for transactions that ultimately aren’t prudent or reasonable once discovered. So it is in the trustee’s best interests to act transparently and provide ongoing information to the beneficiaries. When a trustee so acts, state law also provides a mechanism that can limit a beneficiary’s time to file a lawsuit against the trustee for items properly disclosed. The trustee’s attorney typically invokes this mechanism with the annual accounting.
The reason for these laws becomes evident when you consider that a trustee is not governed by a court. A major reason one might create a trust is to avoid the time and expense associated with court approvals, accountings and oversight with a guardianship in the event of a client disability, or a probate in the event of a client death. When a trustee has no court oversight and does not have to account to beneficiaries, negligence and fraud could go unchecked. That’s one reason it becomes so important to name the right party as your trustee in the event you can’t serve for yourself.
Assuming that a client still wants a secret trust, how does he achieve his goal? The answer lies in finding a state that allows for nondisclosure. A variety of states meet this bill, including Nevada, Alaska and others. I have drafted Nevada trusts for my Florida clients who wish to hide trusts and assets from beneficiaries, and in this discussion will use Nevada as my example. The process to create a secret trust is more complicated, and requires a trustee in that state to serve. We also get a Nevada attorney to review the trust for state law sufficiency and in the best circumstances the Nevada trustee has more than simple administrative powers. They usually also must have discretionary distribution powers for the trust to have the teeth that it needs to achieve the stated goals.
No two secret trusts are drafted the same. The provisions are usually crafted to meet the specific criteria that the grantor of the trust wants. Moreover, the entire revocable trust need not be a Nevada trust. If Martha, for example, has three children, only one of whom she wants to hide information from she can craft a separate trust share for that specific beneficiary. There are numerous details to work through so one would only travel down this path if there were extremely important reasons to do so.
If creating a secret trust is important to you, seek out a qualified estate planning attorney who has experience drafting and implementing a secret trust, and be prepared to specifically describe your situation, reasons for creating the trust, and goals you would like to achieve.
The Sheppard Law Firm is located in Fort Myers and Naples by appointment.
© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.