The Rise of Silent Trusts and the Core Conflicts

In This Issue:

• Why "Silent Trusts" are trending among wealthy families.

• The fundamental tension of Secrecy vs. Accountability.

• Dilemmas and Best Practices.

For many wealthy settlors—particularly parents and grandparents - the instinct to protect their heirs often extends to protecting them from the knowledge of wealth itself. The fear is common: if children know they have a massive safety net, they may lose the drive to work, study, or build a life of their own. This phenomenon, often called "incentive sapping," has driven the rise of the silent trust as a family governance tool.

A silent trust is an irrevocable trust where the trustee is directed not to inform the beneficiaries (refer back to my Instagram post – Grey Flag Report Lesson 8). The motivation behind silent trusts is that settlors seek to instill independence, resilience, and ambition in the next generation. However, this approach creates a fundamental legal paradox that deserves careful consideration.

A trustee owes a fiduciary duty to the beneficiaries, and as legal experts note, "accountability is at the heart of the fiduciary relationship." If the beneficiaries does not know a trust exists, they cannot monitor the trustee. This creates a dangerous environment where the trustee is effectively accountable to no one during the silent period. This accountability gap is the central tension in silent trust design - how can settlors achieve their privacy and incentive-related goals while maintaining the fiduciary safeguards that protect trust assets?

Hong Kong's Legal Framework and the Beneficiary Surrogate Solution

For English common law jurisdiction such as Hong Kong, the legal landscape regarding beneficiary information rights is distinct from the aggressive "statutory silent trust" regimes found in US states like South Dakota or Nevada. Beneficiaries do not have an absolute "proprietary right" to trust documents. Instead, the access to information is a matter of court discretion to ensure proper administration.

However, Hong Kong's current Trustee Ordinance does not contain specific statutory provisions explicitly validating silent trusts or defining the exact limits of nondisclosure. The 2013 reform of the Trustee Ordinance modernized many aspects of Hong Kong trust law. However, Hong Kong did not adopt aggressive "silent trust" statutes comparable to those found in the Bahamas or New Zealand, meaning Hong Kong trustees must tread carefully. A complete refusal to provide information to a beneficiary—even if directed by the settlor—could be challenged in court if it prevents the beneficiary from holding the trustee accountable for misconduct.

The emerging global solution to this dilemma is the appointment of a Beneficiary Surrogate, also known as a "Trust Protector." This trusted individual receives statements, reports, and notices on behalf of the uninformed beneficiary. The effect is powerful: it ensures someone is actively watching the trustee, reviewing investment performance, and verifying that no theft or mismanagement occurs, thereby satisfying the legal requirement for accountability while keeping the ultimate beneficiary in the dark regarding the trust's existence. For Hong Kong applications, settlors should carefully draft "Enforcer" or "Protector" provisions into the trust deed. While Hong Kong law is less explicit regarding the surrogate's liability shield compared to US jurisdictions, appointing a protector to receive accounts is a best practice that defensibly demonstrates the trust is legitimate and properly supervised, rather than a sham (“fake”) arrangement lacking all accountability.

Dilemmas and Best Practices

For Trustees, should a beneficiary discover the trust years later and sue for non-disclosure, the defense that "the settlor told me to keep it quiet" is often legally weak and insufficient. Professional trustees cannot rely solely on settlor instructions to shield themselves from fiduciary liability. Under Hong Kong's 2013 Trustee Ordinance reforms, professional trustees who are remunerated for their services face heightened standards: they can no longer exclude themselves against liabilities for fraud, wilful misconduct, or gross negligence. This prohibition reflects Hong Kong's commitment to protecting beneficiaries.

To effectively mitigate liability, trustees administering silent trusts should implement the following best practices. First, never rely on a "Letter of Wishes" or verbal request for silence. The non-disclosure mandate must be explicitly written in the Trust Deed itself, creating a clear and documented record of the settlor's intent and the trustee's authorization. Second, avoid vague terms like "when the beneficiary is mature" or "when they are ready." Instead, set a definitive, measurable trigger such as "Age 30" to eliminate ambiguity about when the silence obligation ends.

Third, trustees should have a "spill the beans" clause that specifies what happens if a beneficiary discovers the trust accidentally—for instance, by finding a bank statement or learning of it through a third party. Does the silence obligation end immediately upon discovery, or does it continue until the specified trigger date? Without clear provisions, a trustee asked directly by a beneficiary if a trust exists faces a dilemma: lying is a breach of the duty of loyalty, but answering truthfully breaches the silent trust provisions This clarity prevents disputes and demonstrates the trustee's good-faith attempt to manage an inherently complex situation.

The silent trust is a powerful tool for family governance, but it walks a fine line between protecting settlors' privacy goals and maintaining adequate accountability. For Hong Kong families, balancing the desire for confidentiality with the legal realities of the common law system requires meticulous consideration and, ideally, the appointment of a trusted Protector or Surrogate to bridge the information gap. This approach transforms the silent trust from a potentially problematic arrangement into a defensible structure that serves both family objectives and fiduciary integrity.

Disclaimer: All views expressed and facts given in this article reflect those of the writers, and/ or Crescent Legacy. They are neither endorsed nor verified by Asia First Consulting Services Ltd or Global Media Solutions Ltd