D

20 TRUSTS & ESTATES / trustsandestates.com MARCH 2004

Despite its scope, the Uniform Trust Code (UTC) has provoked surpris-ingly little debate since it was first proposed by the NationalConference of Commissioners on Uniform State Laws. The UTCredraws almost the entire territory of trust law—a body of law that hashistorically evolved at a pace measured in decades and centuries, notmere years. In its 100-plus sections, the UTC restates and revises manylong-standing rules and propounds subtle solutions to puzzling oldquestions. Yet only a few items in this shiny catalogue have been diffi-cult to sell to the scores of trustees, legislative staffers and advisors in asmany as 30 states that have scrutinized it.

Probably the most confusing of the UTC provisions concerns howmuch trust information must be disclosed to beneficiaries and a settlor’sright to control the answer to that question. Trust professionals and

legal advisors have protested that the UTC requires toomuch disclosure. In fact, opposition to the disclosure rulesand a short list of other items grew so strong in Arizonathat the legislature, having recently enacted the UTC,voted on the eve of its effective date of Jan. 1 to delay thelaw for two more years to allow time for controversial pro-visions to be addressed.

Supporters claim the UTC simply codifies existing law.1

Clearly, a gap has been exposed between the rule of lawand actual practice, or at least preferences, as to how much

information should be available to whom and when, especially whendisclosure conflicts with a settlor’s intentions.

2

The issue comes into focus if a settlor wants what I call a “quiet trust.”

Opposition tobroad disclosurerules just helped

derail adoptionof the UTC in

Arizona.

ESTATE PLANNINGESTATE PLANNING & TAXATION

In Defense of Quiet TrustsA call to rewrite the Uniform Trust Code so that it still prevents fraud and abuse—but protects confidentility, privacy and discretion

By Donald D. Kozusko, partner, Kozusko Lahey Harris LLP, Washington, D.C.

MARCH 2004 TRUSTS & ESTATES / trustsandestates.com 21

In a quiet trust, a settlor expressly intends toprevent certain (or all) beneficiaries fromlearning about a trust, or at least the details of its terms and holdings, believing that the trustee will make the best decisions with-out the beneficiary’s intervention or knowl-edge. Sometimes disclosure is permitted, butits timing and degree are left to the trustee’sjudgment.

Should the law prohibit settlors from cre-ating quiet trusts? UTC supporters justify theban on the ground that a trustee’s duty to account to beneficiaries is essential.Supporters say the ban promotes trusteeresponsibility, responsiveness, and a healthyrelationship with the beneficiary.

3

But by barring this choice, the UTC haseffectively declared the quiet trust violatespublic policy—an official contempt usuallyreserved for transfers in fraud of a settlor’screditors, or gifts tied to racial or religiousovertones.

If accountability can be managed by othermeans, does it still make sense to thwart asettlor’s desire to minimize disclosure to ben-eficiaries? In its recently adopted version ofthe UTC, the District of Columbia devised arelatively simple solution. The nation’s capitalnow allows settlors to name a representativeto receive UTC disclosure on behalf of bene-ficiaries. This change creates opportunities todesign quiet trusts to satisfy a spectrum oflegitimate objectives—without toleratingmismanagement.

LET THE SUN SHINE The UTC rests on the premise that forcingfiduciaries to keep beneficiaries informed—and to answer beneficiaries’ inquiries foralmost any information—is the immutableline of defense against fraud, waste and abusein trust administration.

Certainly in the legal and political cultureof the United States, we have an abiding faiththat the sunshine of disclosure empowers theeveryman to ward off all manner of demons.We prevent abuse by disclosure, posting thetax returns of private foundations on the

Internet. We punish accused wrongdoers bypublicity staging perp walks of Fortune 500executives that would make Elliot Nessproud. We consumers are kept informedabout things that most of us cannot under-stand (snack packages warning of trans-whatever fat content) or about things that wehopefully already know (signs alerting us notto stand on the top step of tall ladders).

It may be that our faith in disclosure issuited to personal trusts. Out of respect fortradition, private property and family values,the law allows settlors to name family mem-bers and friends as trustees. We allow thisselection without imposing licensing require-ments or other minimal quality standards—unlike the rules we apply to trust companiesor many other types of financial serviceproviders. Given this freedom to choose atrustee, a duty to disclose could be justified asa necessary safeguard. People who areintended to benefit from the managementefforts of amateur trustees should be keptinformed about how things are going, as analternative to more intrusive regulation.

AGAINST THE GRAINOn the other hand, the opposition to theUTC’s rules of full disclosure has sent a differ-ent message: It’s time for a fresh look at dis-closure mandates.

The trust law requiring reporting to bene-ficiaries was developed before the industrialrevolution, much less the information age.Compliance with disclosure rules was moreeasily accomplished and less threateningwhen investment choices were simpler thantoday, families more homogeneous, and dis-putes over rights and remedies had not yetbecome a profit center for lawyers. In earliertimes, we lived in closer-knit communitiesand the typical stores of wealth were morevisible, making confidentiality hard toachieve in any event.

By restating and amplifying old disclosurestandards, the UTC overlooks the need toadapt the trust form so that it offers a choicethat respects our contemporary concerns

Why thwart

a settlor’s

desire to

minimize

disclosure if

accountability

can be

managed by

some other

means?

ESTATE PLANNING & TAXATION

22 TRUSTS & ESTATES / trustsandestates.com MARCH 2004

about confidentiality and manage-ment of wealth transfers. Indeed,today’s prevailing public policy callsfor fewer trust rules, not moredetailed rights that increase compli-ance costs and invite legal chal-lenges. Modern trust laws have liber-alized the restrictions on perpetualtrusts and the procedures for chang-ing irrevocable trusts and settlingtrust controversies, as well as thecustomary prohibitions against dele-gation and allocation of fiduciaryresponsibilities. Still other changeshave opened the trust investmentprocess and reduced the cost of reg-ulation surrounding wealth transfers,by liberalizing probate laws andembracing the Prudent Investor Rule.

Most importantly, we have seenin the last 20 years a substantialgrowth in lifetime giving, pushedlargely by the opportunity to reduceestate and gift tax costs. Settlorstoday are more likely to be surren-dering wealth while they are still liv-ing, and are more conscious of theoutcome and effect their early giftshave on young or immature benefi-ciaries. All of these developmentshave increased the importance ofgiving choices to settlors, and sug-gest that the desire for quiet trustswill intensify.

U.S. trust and inheritance lawgenerally has been kind to settlors’intentions. Settlors are allowed todisinherit their children, grantunchecked powers of appointmentover a trust to anyone they choose,give fiduciary powers to inexperi-enced trustees, and provide stan-dards for trust distributions that areso discretionary, and investmentpowers that are so broad, as to putthe trustee’s decision virtuallybeyond challenge. These laws rest ona common foundation: a belief thatpeople who use these tools do soknowingly and that, absent someoverriding public policy, those choic-es should be respected.

It is inconsistent with a respect

for private property to prohibit quiettrusts by specifying what trusteesmust disclose, even if it contradicts asettlor’s best judgment.

4The UTC

paradoxically favors a beneficiary’sright to information over a settlor’sright to shape those rights in the firstplace. It seems incongruous that asettlor can control a beneficiary’seconomic enjoyment, but not hisinformation rights.

5

While the UTC represents a blendof codified existing law and compro-mises on new rules of law on manytopics, the sweeping strokes of logicrelied upon by UTC supporters donot justify the scope and detail of thecode’s disclosure rules. These rules

apply to every trustee, regardless ofqualifications, and every settlor,regardless of family circumstances.They call for disclosure of everythingsought in what the code calls a “rea-sonable” request made by any per-son who might receive a distributionfrom the trust at any time, howeverunlikely that distribution may be.The rules encourage such requestsby requiring formal notice to mostbeneficiaries of these rights. Is thissystem the only way to avoid mis-management by trustees lacking infiduciary experience or expertise?

A SIMPLE SOLUTIONSettlors’ desires for quiet trustsdemand more attention than theUTC drafters anticipated. How, then,to balance the need for quiet trustswith the need to protect against mis-

management? In fact, the UTC andother modern trust laws suggest asimple solution. Trust law, both inUTC Section 808 and elsewhere,lets settlors provide for specializedfiduciaries and varying standards ofpersonal liability for such fiduciaries.Using these concepts, trust lawcould be rewritten to allow settlorsto substitute for beneficiaries, awatchman to whom disclosure ismade. Washington, D.C. adoptedthis approach in its version of theUTC, which became effective earlyin 2004. The D.C. statute allows set-tlors to name one or more peoplewho will receive disclosure other-wise due to one or more of the ben-

eficiaries. These watch-men are required by thestatute to act “in goodfaith” to protect the inter-ests of those beneficiaries.

6

Who watches thewatchman? Possibly noone,

7depending on the

rules in each trust govern-ing the number of fiducia-ries and the process forremoval and appointment.Still the D.C. solution is a

good one. The settlor who wants tomake a gift, but in a quiet trust,needs a more reliable alternativethan the only other option availableunder the UTC: granting someoneelse a power of appointment overthe trust that is exercisable in favorof the reckless or untested benefi-ciary. As this power holder is notconstrained by any fiduciary duty to honor the settlor’s intention, thisalternative is certainly less reliablethan a quiet trust that shifts dis-closure to a substitute watchman,and less favorable to the intendedbeneficiary.

TRUST DESIGNWhat if, like Kansas, a state passesthe UTC but amends it to allow sett-lors to unconditionally waive atrustee’s duty to disclose? In those

ESTATE PLANNING & TAXATION

Trust law could berewritten to allow settlors to substitute a watchman to whom disclosure is made inlieu of beneficiaries.

24 TRUSTS & ESTATES / trustsandestates.com MONTH YEAR

states, settlors could select theWashington innovation by writingthe watchman’s role into the trustdocument as a condition of the waiv-er of the duty.

The Washington structure couldbe further adjusted to fit each trust’sindividual circumstances. For exam-ple, management of substantial

funds in a quiet trust during a longperiod may warrant a stronger trustgovernance structure. So a trust doc-ument could call for a periodicreview by a third party such as apeer review by an independent pro-fessional trustee every five years oran accounting review or both. Thepurpose of such a review would be

prophylactic, to discourage neglector collusion.

8The review process

also would help assure trustees thattheir stewardship of the trusts is lesslikely to be successfully challenged.

9

How would this structure work ifa trust ended up in court? An unin-formed beneficiary could be givenwhatever information the substitute

ESTATE PLANNING & TAXATION

AGE-OLD PROBLEMThe need to keep information from beneficiaries is not new

The phrase “quiet trust” is my name for a trust thatrestricts disclosure to beneficiaries. The ideabehind it grows out of the conflict between the

right of a beneficiary to know about a trust and a settlor’sdesire to control that information.

Why is a quiet trust needed? Anyone with experiencewith personal trusts has come across a settlor who’dprefer that one or more of the beneficiaries of his irrevo-cable trust not be told about the wealth it holds, or eventhat the trust exists. The settlor wants distributions to bemade if and when needed, but only as a trusteedecides, not as the beneficiary expects or demands. Hewants information about the trust terms and assetsrationed out in the same way.

1

These constraints on access to information may be asettlor’s solution for dealing with a particularly immature oreven reckless beneficiary. More often, the concern forconfidentiality is a response to a persistent fear that easymoney corrupts untested character.

2A settlor believes

that if the trust is fully disclosed early on, young familymembers are more likely to grow up feeling dependentand conflicted, fail to develop their natural ambition anddesire for independence, and may seek to challenge thetrustee’s authority. A settlor wants a quiet trust, one thatspeaks to the beneficiary only if and when needed, inorder to safeguard against the dangers created byknowledge of wealth close at hand.

3

Anyone who sets out to construct such a trust mustfirst confront the mysteries of human motivation and dis-cipline. It is clear that intellectual accomplishment is notsynonymous with financial prudence. History providesexamples of extraordinary talents, such as ThomasJefferson and Mark Twain, who were poor stewards ofwealth. Moreover, the connection between inheritedwealth and personal ambition is not well understood.Anecdotal evidence and academic studies point in manydirections; those who are seriously wealthy or advise oth-ers in that class have differing views on whether it is use-ful or counterproductive to try to manage the motivation of

younger family members by minimizing their knowledge ofthe family fortune, or by minimizing their inheritance.

4

—Donald D. Kozusko

Endnotes1. The focus here is on the law and practice in the United States,

but British trust law has also faced the issue with some fre-quency. See Ingrid Pierce, “Do Beneficiaries Have ‘Rights’ toInformation and at What Cost to Trustees?” Vol. 9, Issue 9, Trustsand Trustees (Sept. 2003); Dietmar Loretz, “Beneficiaries’ Rightsto Information in Liechtenstein: Can the Trust Deed ExcludeThis?” Vol. 9, Issue 10, Trusts and Trustees (Oct. 2003);Rosewood Trust Ltd v Vadim Schmidt [2001] 3 ITELR 734.

2. The personal fallout from inherited wealth has recently beenaddressed in “Born Rich,” an HBO documentary directed by heirJamie Johnson and in Worth magazine (“The Inheritance Issue,”Vol. 12., no. 2, March 2003). Professional estate planning arti-cles on drafting incentive trusts also address this issue. See EllenWhiting, “Controlling Behavior by Controlling the Inheritance,” Vol.15, no. 5 Probate and Property p. 6 (Sept/Oct 2001); and fam-ily constitutions (William Doyle, “Creating a Framework for FamilyGovernance,” Trusts & Estates, Nov. 1999, pg. 42.

3. Such a confidential trust is “quiet,” but not secret, because infor-mation reporting is due to any beneficiary, if and when hereceives a distribution. Also, the Schedule K-1 used for federalincome tax purposes will supply enough data to encourage edu-cated guesses about the size of the trust. Using more than onetrust tends to minimize, but not eliminate, this disclosure risk.

4. See the extensive materials on this topic collected atwww.kozlaw.com (click on: how we think, our views, controllingwealth, inheriting values). Successful entrepreneurs tend toworry about this issue more than most people. DineshD’Souza, The Virtue of Prosperity: Finding Values in an Age ofTechno-Affluence 59 (The Free Press 2000). Charles Schwab,in a CSPAN interview on Jan. 25, 2003, stated emphaticallythat children should not inherit an “outrageous” amount ofassets. In Schwab’s opinion, the right size of inheritance isenough to obtain an education and start a business, but not tofinance a “life full of lollipops.” Schwab suggested that “mostresponsible people feel that way.” On the other hand, advisorsto wealthy families believe that an inheritance can be an oppor-tunity, rather than a handicap, if inheritors are offered guidance,knowledge and encouragement needed to participate activelyin wealth management and still pursue their own dreams.James E. Hughes, Jr., Family Wealth: Keeping it in the Family(NetWrx, Inc. 1997).

26 TRUSTS & ESTATES / trustsandestates.com MARCH 2004

watchman saw fit; a guardian adlitem acting for the beneficiary couldmake any necessary decisions.Ideally, local law or court proceduresshould provide for sealing of thecourt record on personal trust andestate matters upon request of anyinterested party.

10This would not

only allow the substitute watchmanto maintain confidentiality, but alsowould protect against gratuitouspublic curiosity in the event of a con-tentious court dispute.

11

If the option of a quiet trust wasreadily available, we also would seethe development of more creative

uses of confidential gifts in trust.Suppose, for example, that thefounder of a privately owned busi-ness wanted to make some large giftsof stock for tax purposes, but didn’twant to encourage a debate over thedirection of the business with hisyounger family members, who arealso his intended beneficiaries.

12

Using nonvoting stock for the giftwould likely not provide enoughreassurance. A quiet trust of nonvot-ing stock would be far more reliable.

In a different context, settlors alsowould be free to create trusts fortheir siblings that were intended as

safety nets, used only if needed.Settlors also would be freer to useshifting and discretionary trust inter-ests that applied different terms atdifferent times, depending on thecircumstances for friends and familymembers. A quiet trust arrangementwould eliminate the potential embar-rassment of having to tell almostevery beneficiary about those partsof the document that once wereoperative but became obsolete forpersonal reasons.

In short, if quiet trusts were moreflexible and available, there wouldbe less sunshine but more options to

ESTATE PLANNING & TAXATION

The Uniform Trust Code (UTC) requires detaileddisclosure under Section 813 to all “qualified ben-eficiaries” under UTC section 113(12). Qualified

beneficiaries are roughly classified into:

• first-in-line—those who must or could, in the trustee’sdiscretion, receive a current distribution; and

• next-in-line—those who would join the first group ifthe interest of someone in the first group was to ter-minate (such as by death, passage of time, or termi-nation of the entire trust). A 30-year-old who receives trust income until he’s 35,

at which time he receives the entire trust fund outright, isa qualified beneficiary. But so are his children, who wouldreceive distributions if the 30-year-old died prematurely.

The list of required disclosures is comprehensive. Itincludes:

• a copy of the entire trust document wheneverrequested, not just the part the trustee considers rel-evant to the particular beneficiary’s interest;

• complete financial accounts, at least annually;

• notice of interim events that are “material” so that allaffected beneficiaries can act to protect their interests,such as to prevent the sale of a major asset; and

• information on how to contact the trustee and howmuch the trustee is or will be paid. A trustee must notify each qualified beneficiary of his

rights to information, such as his right to the entire trustdocument and complete financial accounts.

Under Section 813, a trustee also must satisfy anyrequest for information made by any beneficiary unlessthe request is “unreasonable.”

1 This duty to respond

applies even to remote beneficiaries who are not amongthe qualified beneficiaries. So every trust beneficiary like-ly will be able to acquire all or most of the required dis-closure listed above, if he knows enough to ask. Anyindividual who knows about a trust (or bears some rela-tionship to the settlor) might inquire whether he is a ben-eficiary. Even if he is a remote beneficiary, he couldmake a standing request to be supplied with all of theinformation that must be provided to qualified beneficia-ries. A trustee would think twice before rejecting thatrequest as “unreasonable.”

UTC Section 105(b)(8) and (9) limits a settlor’s free-dom to waive these required disclosures. A trust docu-ment can remove the affirmative duty to provide accountsand interim material information to beneficiaries. But theduty to notify qualified beneficiaries about a trust and theirright to request certain information cannot be restricted forbeneficiaries who are at least 25 years old. The duty torespond to requests cannot be restricted, includingrequests made by more remote beneficiaries who are notin the two qualified groups.

2So, while a waiver may be

occasionally useful, the fine distinctions between whatduties can and cannot be waived do not provide anypractical assurance of confidentiality. The UTC rule, ineffect, has declared that each beneficiary, or certainlyeach qualified beneficiary, needs and deserves substan-tial information rights regardless of a settlor’s intent.

—Donald D. Kozusko

Endnotes1. UTC Section 813. 2. UTC Section 105 (b)(8) and (9).

CONFIDENTIALITY DESTROYEDThe proposed law forces too much disclosure to too many

28 TRUSTS & ESTATES

manage wealth transfers across aspectrum of different needs andfamily circumstances. Such innova-tions help keep the trust modeladaptive and alive, encouragingimprovements in trust governance,and avoiding the confining logic that declares more disclosure is better simply because some disclo-sure is good. ❙

Endnotes1. David English, “The Controversy over

UTC Section 105(b)(8),” UTC Notes,p. 2 NCCUSL Spring 2003, availableat http://www.utcproject.org.

2. The gap between theory and practicealso reveals the serious policy dis-agreement as to the disclosure need-ed. District of Columbia, JudiciaryComm. Report on Bill 15-234, p. 8(2003).

3. English, p. 4; Joseph Kartiganer andRaymond Young, “The UTC: Help for Beneficiaries and TheirAttorneys,” UTC Notes, p.4-5

(NCCUSL Fall 2002), available athttp://www.utcproject.org.

4 . Similarly, someone can choose to havehis assets managed in the event ofincapacity under a power of attorney,or can leave them in a joint account,without the law imposing mandatorystandards of disclosure on the persongranted the access to the funds.

5. For example, Delaware recentlyamended Section 3303 of Title 12 ofthe Delaware Code to make it clearthat the “terms of the governinginstrument may vary the rights andinterests of the beneficiaries” includ-ing information.

6. Note also that the decisions and otheractions of a guardian ad litem, or sim-ilar legal representative, usually aresubject to only minimal oversight bythe court process in trust matters.Extensive regulation is not the univer-sal norm in trust law.

7. District of Columbia Uniform TrustAct of 2003, Bill 15-234, section 19-1301.05 (c).

8. James E. Hughes, Jr., Family Wealth:

Keeping it in the Family (NetWrx,Inc. 1997) p. 129.

9. The statute of limitations on claimsagainst a trustee is usually tied to abeneficiary’s knowledge and disclo-sure to a surrogate may not be suffi-cient for this purpose. UTC Section1005(a).

10. S. Dakota Codified Laws Section 21-22-28 (court record sealed uponrequest of settlor, trustee, or any ben-eficiary); Shenandoah PublishingHouse, Inc. v. Virginia K. Fanning, Ex.,368 S.E.2d 253 (S.C. Va. 1988) (suc-cessful challenge to lower court’sorder to seal records of civil trial). Thetrust document could be written torequire beneficiaries to support apetition for such a request for privacy,even if the law did not grant it as amatter of right.

11. For example, the trust dispute amongmembers of the family that foundedthe Hyatt hotel chain was describedin detail in Susan Fitch, “Pritzker v.Pritzker,” p. 142, Vol. 172, no. 11 Forbes(Nov. 24, 2003).

12. Richard S. Tedlow, The WatsonDynasty: The Fiery Reign andTroubled Legacy of IBM’s FoundingFather and Son (Harper Business,2003), describes a very contentiousrelationship between the Watsonswhen they were running IBM.

ESTATE PLANNING & TAXATION

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