Trusts are a great financial tool parents and caregivers often use in order to control their children’s access to assets. Normally, kids know that a trust has been set up for them, but trend in recent years has been to create “quiet” or “silent” trusts. These entities are shaking up the way people hand over property and money to heirs and can have a big influence on financial lessons.
What It Is
A quiet trust is a trust that someone creates without telling the beneficiary. Similar to other trusts, it can be used to hold a wide variety of assets, including personal possessions, stocks, bonds, real estate and life insurance. In fact, aside from the fact that the beneficiary is in the dark about his good fortune, there’s virtually no difference between this type of trust and a traditional one. They’re generally associated with families that are a little more well-to-do, but virtually anyone who wants to set assets aside can use this option.
Advantages and Reasons for Use
The main reason parents and caregivers turn to quiet trusts for their kids is that they don’t want them to develop a sense of entitlement. The hope is that, if a child believes that money is a little more scarce, he’ll work a little harder to save and make good purchase and investment decisions. In theory, the positive financial habits that develop as a result will mean better overall management of the assets held in the trust once the child gains access to them.
Many people establish quiet and regular trusts for the tax and probate benefits they provide. They generally keep assets out of probate, reducing what it costs to settle estates. Depending on how they are set up, they can offer reduced inheritance taxes or other advantages such as delaying when the assets are taxed as income.
When your child knows that he has something in a trust, there’s really nothing to stop you from talking about the assets with him. If your child doesn’t have an inkling there’s assets waiting, you don’t have the option of including him in serious financial planning about them. There is also the chance that he can be overwhelmed with the sudden acquisition of whatever you’ve held for him, doubting the choices he made because he didn’t know the assets were coming. He might be resentful and think that you did not trust him enough, or that you think he’s irresponsible. Additionally, establishing the trust usually requires going to an attorney, and the fees can be very expensive.
Setting One Up
The rules for how to set up a quiet trust vary based on jurisdiction, but because trusts usually are considered to be a legal entity, you generally need to formalize the setup by creating proper paperwork, which then typically has to be notarized and signed. Although you can often oversee a trust you create, many people choose to have someone else, called a trustee, manage their trusts. If you choose this option, you usually also have to transfer the title of the assets to the trustee. It can take a few weeks to get everything nailed down.
Aside from these logistical details, setting up a quiet trust requires that you reevaluate your current financial position. Although it almost goes without saying, you’ll need to know what assets you want to involve and the value they have before you head to an attorney’s office.