"Secret Trusts" Sometimes A Necessity; Now A Possibility

The 2017 Session of the Maryland General Assembly ended in April, and the various bills affecting our estate and tax planning options that passed were all recently signed by the Governor.  Of all the bills that passed, only one has real potential to add a significant tool to our estate planning toolbox.

Under the new law, the creator of a trust is allowed to designate someone other than a beneficiary to receive information about a trust and to act on behalf of that beneficiary in all respects with regard to that trust. That person is called a “Representative.” The information given to the Representative can include the trust agreement itself, annual accountings, and information provided to taxing authorities.   

In other words, it is now possible to keep a trust secret from a beneficiary – to create a “secret trust.” 

Under prior law, a qualified beneficiary of a trust had the right to receive any information that was relevant or material to that trust.  This right was nearly absolute in all regards. A qualified beneficiary is defined to include both current beneficiaries and certain remainder beneficiaries of a trust.

This right to information created some awkward situations.  What about a trust established for a child with an alcohol or drug problem?  Or a beneficiary who just can’t handle money?  Or a situation with blended families, where one spouse sets up a trust for the other spouse and doesn’t want the children from a prior marriage hovering about waiting to get their inheritances.  There are countless situations where a person may not want beneficiaries to get full access to information about the trust itself, or what is being held in the trust.  Indeed, it is sometimes very beneficial to keep the trust a secret.

Now, there’s an option to help avoid these situations.

All that needs to be done is to name someone in the trust agreement, other than a trustee, to be the beneficiary’s Representative.  A basic rule involving trusts is that the trustee must be accountable to someone.  It used to be that it was the beneficiary who kept the trustee accountable.  Under the new law, that person need only be someone other than the trustee.

If a person is designated by the creator of a trust to represent a beneficiary’s interests under the trust, it should be noted that the Representative can be held liable by a beneficiary only if that person has agreed to represent the beneficiary and the Representative has acted in bad faith with regard to the beneficiary’s interests.  In other words, absent bad faith, a Representative is protected from any liability for serving in that role.

For those who are interested in taking advantage of the provisions of this new law, it will be necessary to modify any existing trust provisions, whether those trust provisions are in a Will or a Revocable Living Trust.  These documents can be amended through a Codicil or Trust Amendment with the help of your attorney.

While it may sound like something sneaky or underhanded, it really isn’t.  As described above, there are numerous situations where even the knowledge that a trust exists can be detrimental to a beneficiary’s development or the interests of others in the family.  It makes sense to allow the owner of property to transfer that property into trust for a beneficiary, under the conditions that the creator of the trust deems to be appropriate to meet their overall goals.

Michael Davis is an attorney with the Estate Planning practice group at Davis, Agnor, Rapaport & Skalny, LLC. For questions about this article, please do not hesitate to contact Michael.