Maintaining flexibility: How sprinkling trusts work
When we think of legacies and inheritances, we often associate the term fairness. But fairness means different things to different people. One person will say that distributing assets to inheritors fairly is equivalent to each one receiving the same share. Another person will argue that treating people fairly means paying attention to an individual’s needs and accordingly adjusting distributions.
Let’s look at a hypothetical scenario: Heather and Juan have three teenage children with different abilities and interests. The oldest wants to become a professional violinist, the middle one is a passionate soccer player, and the third and youngest, a computer nerd, spends her free time creating smartphone apps. Heather and Juan face a question: Ten or 15 years down the road, which one of their children will most need financial support?
There is, of course, no way of knowing. The app girl might never finish college but found a tech start-up company that leaves her financially independent by the time she is 25; the violinist might have to take out student loans to finance college but then find a job with a philharmonic orchestra and be able to secure additional income through teaching music; the soccer player might attend college on a generous sports scholarship and start his career as a professional player but then have to go back to school because a serious injury has limited his athletic options.
Fortunately, there’s an estate planning tool for situations like these: the sprinkling trust, also called spray trust. With sprinkling trusts, the trustee is free to determine which share of the trust’s earnings and principal should go to each inheritor at which point. He or she can distribute the funds evenly among beneficiaries or give one person more than the other or even limit payments to one individual. The grantor can lay out a few ground rules, such as when the trust should end and what should happen with any remaining funds, or he can let the trustee decide all the details.
In the scenario above, the only thing Heather and Juan stipulate for their trust is that the funds should be used according to the needs of their children. Eventually, their trustee may well determine that the tech girl doesn’t need any financial support while the violinist needs some and the soccer player requires even more assistance. The point is that sprinkling trusts adjust well to changing life situations because of their flexibility. Are they more fair than other trusts where beneficiaries are allotted equal distributions? It depends on your definition of fairness.
By Kevin J. Moore