Too much information? Consider disclosure rules when designing trusts



Estate Planner May-June 2006
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Trusts are an integral part of many estate plans, and often there are advantages to keeping the trust’s terms – or even its existence – confidential. Why? Perhaps your beneficiary is immature or reckless. Or you may be concerned that knowledge of the trust would cause your beneficiary to become dependent on it and fail to pursue his or her own ambitions.

There are many legitimate reasons for keeping a trust quiet. But in many cases, state law interferes with this goal by requiring a trustee to disclose information about the trust to its beneficiaries.

ABCs of UTC

The Uniform Trust Code (UTC), which has been adopted in many states, requires the trustee of certain trusts to disclose detailed information about a trust to any “qualified beneficiary” who requests it. Qualified beneficiaries include not only those who may receive a distribution under the trust (your children, for example), but also those who might benefit if a “first-in-line” beneficiary’s interest terminates (your grandchildren, for example).

The UTC also requires you to notify each qualified beneficiary of his or her rights to information, making it nearly impossible to keep the trust a secret from your beneficiaries.

The purpose of the UTC’s disclosure provisions is to help avoid fraud or mismanagement on the part of trustees by allowing beneficiaries to monitor the trust’s financial activities and performance. Some states that have adopted the UTC allow you to waive the trustee’s duty to disclose. Others allow you to name one or more third parties to receive required disclosures and protect the beneficiaries’ interests.

An alternative strategy

If applicable law doesn’t provide a mechanism for avoiding disclosure to your child or other beneficiary, an alternative strategy is to grant your spouse or someone else a power of appointment over the trust. The person who holds the power of appointment can then redirect trust assets to your child if needed.

This solves the disclosure problem, because you don’t have to name your child as a trust beneficiary. The primary disadvantage of this approach is that the power holder has no legal obligation to honor your intentions.

Put your trust in trusts

Trusts are commonplace in estate plans. Before you create a trust or if you’re concerned about the confidentiality of your trusts, be sure to consider the law in your state.