Magwitch, a now-prosperous ex-convict, asks you to create a trust for the education of a young orphan, Pip. He insists that Pip not be informed about the source of the funds. What is your advice?

The trustee of a trust is accountable to its beneficiaries, who are the ones with standing to assert a claim for breach of trust or demand that the trustee file ajudicial accounting proceeding. For the trust to be enforceable as a practical matter, the beneficiaries should be informed of their interest in the trust. Nevertheless, over the past decade more than 30 jurisdictions have enacted legislation—primarily driven by controversial provisions included in the 2000 Uniform Trust Code (UTC)—permitting some form of a “quiet”1 or “silent” trust in which the settlor abrogates or severely limits a trustee’s duty to inform beneficiaries of the existence of an irrevocable trust or to notify beneficiaries of certain other trust information.2 Michigan and Washington have enacted legislation expressly prohibiting the formation of a quiet trust.3

There is no law directly on point in New York dealing with this issue, although analogous cases suggest that a quiet trust would not be permissible. In considering the adoption of the UTC here, divergent views as to how to codify the duty to inform have been proposed. The current proposal, as submitted to the legislature, tracks the controversial UTC provisions that some other states have rejected or modified. If New York enacts these proposals, quiet trusts would not be permitted except for remote contingent beneficiaries and beneficiaries under age 25.

This article will examine some of the policy concerns regarding quiet trusts, the common law principles governing them, New York’s current lack of statutory guidance on the issue and legislative responses to quiet trusts in other states.

What Is a Quiet Trust?

A quiet trust is used when the settlor wants to keep the existence and terms of the trust from the beneficiaries, for at least some period of time. This desire may arise for a variety of reasons (privacy, or avoiding spoiling or disincentivizing children, for example). Beneficiaries are still identified in the trust instrument by name or class description, but some or all of them will not be notified of certain information relating to the trust (including the trust’s existence). Just how much or how little information must be provided to the beneficiaries of a quiet trust will depend on the terms of the trust instrument as well as the law in the jurisdiction in which the trust is created. For example, the trustee may be required to:

• notify current beneficiaries but not contingent beneficiaries;

• provide information (including the terms of the trust agreement) to beneficiaries upon their request but not to volunteer it;

• be prohibited from providing information to the beneficiaries even upon request;

• provide information to only certain beneficiaries; or

• provide information to a surrogate designated to receive the information.

Quiet Trusts: Common Law

Although the trustee’s duty to inform beneficiaries has been a fixture in Anglo-American law for almost two centuries,4 the scope of this duty is still unclear.5 Must the trustee affirmatively inform the beneficiary or does the trustee simply have to provide information only upon the beneficiary’s request (in which case, how will a beneficiary who lacks knowledge of the existence of the trust know to request information from the trustee)?

The First and Second Restatements of Trusts followed the “upon request” view,6 and the Third Restatement of Trusts recites a trustee’s duty to inform certain beneficiaries “of the existence of the trust, of their status as beneficiaries and their right to obtain further information,” but allows that duty to be waived in the trust agreement.7 However, there have been a few cases elsewhere suggesting the existence of an additional (perhaps non-waivable) affirmative duty of disclosure8 to ensure that “the trust [is not rendered] unenforceable by those it was meant to benefit.”9

Current New York Law

New York is one of the states that has not enacted any legislation addressing quiet trusts. The only statutory guidance appears in the Surrogate’s Court Procedure Act (SCPA) §§2306, 2308 and 2309. These sections require the trustee to furnish annual statements to the beneficiary upon request. The statute does not say whether a trustee has a duty to inform beneficiaries of the trust’s existence. However, it may be that allowing the trustee to keep the existence of the trust from the beneficiaries would circumvent the intent of those SCPA provisions because the beneficiaries would not know that there was even a trust for which they could request the annual statements. Case law in New York unfortunately does not provide much guidance because most cases pertain to a trustee’s duty to account.10

If the Restatements of Trusts’ view that a trustee’s duty to informinitiates only upon a beneficiary’s request for information is followed in New York, then a settlor may be able to keep the existence of the trust from all of the beneficiaries. By contrast, if New York courts when faced squarely with the question were to analogize from the related area of a trustee’s duty to account, they could find hiding a trust’s existence from its beneficiaries to be against public policy based on the rationale that there would be no trustee accountability. The specific facts of the case will be important (for example, if the trust’s existence was kept from only some of the beneficiaries or a surrogate was named to receive the information on behalf of the beneficiaries).

Statutory guidance on the quiet trust issue may present itself in the near future if New York decides to adopt the UTC provisions on the duty to inform.

The UTC on Duty to Inform

The UTC as promulgated in 2000 (and amended in 2004) contained detailed provisions defining the duty to inform and whether it can be overridden by a settlor in the trust agreement.11 These duties apply only to irrevocable trusts and a settlor of a revocable trust may waive all reporting to the beneficiaries, even in the event the settlor loses capacity.12

As the states debated the UTC, it became clear that there were many views about the pros and cons of mandatory disclosure to beneficiaries. The 2004 amendments to the UTC added comments to §105 acknowledging that the subsections on the duty to inform/report “have generated more discussion in jurisdictions considering enactment of the UTC than have any other provisions of the Code,” and brackets were placed around §§105(b)(8) and (9) “out of a recognition that there is a lack of consensus on the extent to which a settlor ought to be able to waive reporting to beneficiaries.”

The controversial UTC provisions relating to quiet trusts are:

• UTC §813(a) (imposing a duty to keep qualified beneficiaries (defined in §103(13)) “reasonably informed”);

• UTC §813(b) (requiring the trustee to notify qualified beneficiaries regarding certain changes to the trust, e.g., when a trustee accepts a trusteeship, which occurs at the start of every trust);

• UTC §105(b)(8) (precluding the trust instrument from overriding the duty under §813(b)(2) and (3) to notify qualified beneficiaries “of an irrevocable trust who have attained 25 years of age of the existence of the trust”);

• UTC §105(b)(9) (precluding the trust instrument from overriding the duty under §813(a) “to respond to the request of a [qualified] beneficiary” for certain information); and

• UTC §103(13) (defining “qualified beneficiary” to exclude contingent beneficiaries).

The result of these provisions is the prohibition of quiet trusts as to present and presumptive beneficiaries age 25 and over regardless of what the settlor puts into the trust instrument. However, quiet trusts as to beneficiaries under 25 and contingent beneficiaries would be permitted.13

New York Proposals

In considering the enactment of the UTC in New York, the EPTL-SCPA Legislative Advisory Committee reviewed the provisions of the UTC and formally reported its recommendations as to its enactment in the Sixth Report submitted earlier this year.14

The final version of the Sixth Report recommends the enactment of all the UTC provisions summarized above (with a few minor changes to the language). If enacted (including the language bracketed in the 2004 amendments), New York would be the first state to enact these UTC provisions without substantial modification or addition.15

Although these provisions are more restrictive toward the formation of quiet trusts than legislation passed in several other states (see below), the benefit is the clarity that the legislation will provide to settlors, trustees, and drafters. While a broad degree of disclosure will be mandated, settlors will be able to keep trusts secret from young beneficiaries until they are more mature.

Other suggestions were considered during the review process, and these included permitting the formation of all quiet trusts through the adoption of the “upon request” view set out in the First and Second Restatements of Trusts (and SCPA §§2306, 2308 & 2309) in addition to allowing the settlor to waive the duty to provide certain information to the beneficiary (even without the beneficiary requesting it). Under that suggestion, a quiet trust would have been permissible by New York law regardless of the beneficiary’s age or interest in the trust.

Other Jurisdictions

The 2004 comments to UTC §105 recognized that “there is little chance that the states will enact Sections 105(b)(8) and (b)(9) with any uniformity.” Indeed, states that have enacted the UTC have taken a variety of different approaches to reconciling privacy concerns with the risk of trustee abuse.16 These variations include: rejecting both UTC §§105(b)(8) and (b)(9); adopting both but eliminating the reference to age 25, which effectively eliminates quiet trusts even for beneficiaries under 25; adopting the provisions but allowing waiver of duties while the settlor is alive; adopting the provisions but allowing the information to be provided to a surrogate instead; and adopting UTC §105(b)(9) but not §105(b)(8).17 On July 8, 2012, Massachusetts adopted the UTC but omitted both UTC §§105(b)(8) and (b)(9). Maryland and New Jersey are currently considering enacting the UTC, but their proposed legislation will also not follow the UTC duty to inform provisions.

The designation of a surrogate is a popular variation that seven jurisdictions18 have currently chosen. The premise is to name a surrogate to receive information that the trustee would otherwise need to supply the beneficiary. As is the case with trust protectors, there is significant uncertainty regarding the role of such a surrogate. Washington, D.C. was the first to enact a statute permitting a surrogate to be designated, but its statute is silent on the standard required of the surrogate.19 Subsequent statutes (for example, Florida’s)20 exonerate the surrogate from liability to the beneficiary if his or her actions or omissions were made “in good faith.” Although this seems to impose a non-fiduciary standard of care, the exact boundaries of “good faith” remain unclear.21

States that have not enacted the UTC have also been faced with this question. Delaware is one of those states. In 2003, shortly after the McNeil22 court found an affirmative duty to inform the beneficiary of his current beneficiary status, the Delaware legislature amended the Delaware trust statute to provide that “the terms of a governing instrument may expand, restrict, eliminate, or otherwise vary the rights and interests of beneficiaries, including, but not limited to, the right to be informed of the beneficiary’s interest for a period of time.”23 How well this statute will work also remains to be seen.

Thus, you can advise Magwich that if he waits until the New York UTC proposal is adopted, the trust agreement can override the UTC duties of disclosure until young Pip becomes a qualified beneficiary at age 25. Current law, though, is unclear, and an informal unwritten arrangement might be best for now if confidentiality is more important than enforceability of the trust (since a signed writing has been required in New York since 199724).

Thus, Jaggers can act as an undisclosed agent for Magwitch rather than a trustee. That is no different than the advice that Magwitch appears to have received in London almost two centuries ago, as reported by a former Gray’s Inn law clerk by the name of Dickens.

Jonathan J. Rikoon is a partner and Louise Ding Yang is an associate at Debevoise & Plimpton. Mr. Rikoon is the chair and Ms. Yang is a member of the firm’s trusts and estates group.

Endnotes:

1. The term “quiet trust,” which will be used throughout this article, was coined by Donald D. Kozusko in his article, “In Defense of Quiet Trusts,” 143 Tr. & Est. 20 (2004).

2. See “Drafting a Silent Trust,” J.P. Morgan (Summer 2012), which provided the inspiration for this article.

3. Mich. Laws Ann. §§700.7105(2)(i) and 700.7814; Wash. Rev. Code §11.97.010 (effective Jan. 1, 2012).

4. T.P. Gallanis, “The Trustee’s Duty to Inform,” 85 N.C. L. Rev. 1595, 1610 (2007).

5. Philip J. Ruce, “The Trustee and the Remainderman: The Trustee’s Duty to Inform,” 46 Real Prop. Prob. and Tr. J. Vol. 46, No. 1, 175 (2011).

6. Restatement of Trusts §173 (1935); Restatement (Second) of Trusts §173 (1959).

7. Restatement (Third) of Trusts §82 (2007).

8. SeeMcNeil v. McNeil, 798 A.2d 503 (Del. 2002) (surcharging trustees for failing to inform the beneficiary of his current beneficiary status).

9. Wilson v. Wilson, 690 S.E.2d 710, 716 (N.C. App. 2010).

10. See In re Malasky, 290 A.D.2d 631 (3d Dep’t 2002); Matter of Kassover, 124 Misc.2d 630 (Sur. Ct. Nassau Co. 1984); In re Crane, 34 N.Y.S.2d 9 (Sup. Ct. N.Y. Co. 1942).

11. Unif. Trust Code §105 cmt. (2004).

12. Id.

13. See UTC §105 cmt. and §103 cmt. (2004).

14. See C. Raymond Radigan, “New Uniform Trust Code to Be Submitted to Legislature,” NYLJ, (Jan. 9, 2012).

15. See “Drafting a Silent Trust,” supra note 2.

16. See id.

17. See id.

18. D.C. Code §19-1301.05(c); Fla. Stat. Ann. §736.0306; Me. Rev. Stat. Ann. Tit. 18-B, §105(3)(B); Mo. Ann. Stat. §456.1-105(3); Ohio Rev. Code Ann. §5801.04(C); Or. Rev. Stat. §130.020(3); 20 Pa. Cons. Stat. Ann. §7780.3(k).

19. Lauren Z. Curry, “Agents in Secrecy: The Use of Information Surrogates in Trust Administration,” 64 Vand. L. Rev. 925, 960 (2011).

20. Fla. Stat. Ann. §736.0306(4).

21. See Curry, id., for a more in-depth discussion of the use of surrogate.

22. See supra note 9.

23. Del. Code Ann. tit. 12, §3303(a) (West 2012).

24. EPTL §7-1.17.