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Introduction. Income tax planning will come into play more and more as emphasis on estate and gift taxes
dims. Many times there are members of the family that the senior generation desires to benefit who are either
in the lowest income tax brackets or perhaps pay no income taxes at all. Students would typically fit into the
latter category with special education benefits that are available. Similarly, a widow or widower may find
herself or himself in a high income tax bracket and not needing more income to live on. Wouldn’t it make
sense for her or him to have some of the family taxable income shunted over to other family members where
the income tax bite might be less and the need for the income greater?
Sprinkle or Spray. Trust writers and practitioners typically use the words "sprinkle" or "spray" to refer to a
provision in a Trust which permits the Trustee to distribute income (a with it the tax liability) to and among
members of the family as the Trustee chooses. Such a provision is called a Sprinkle or Spray Trust.
The whole idea of such a Trust is to permit the Trustee to allocate taxable income where it can best be used
or where the tax impact may be less. In a "Family" or "Credit Shelter" Trust, established irrevocably at the
death of the Grantor of the Trust, a sprinkle or spray provision is quite common. The surviving spouse does
not even have to be a beneficiary, and it is certainly not required that the surviving spouse receive any or all of
the income.
Nonetheless, in the case of most married couples, where the surviving spouse will be dependent, at least in
part, on the Family Trust created by a spouse’s Trust, a sprinkle or spray provision is much less common,
even where the surviving spouse is Trustee.
However, in instances where both spouses have wealth, the power of the Trustee of a Family Trust to sprinkle
income among members a defined class, such as the decedent’s children, may provide an element of
flexibility that can be very helpful to family wealth preservation and tax planning.
When Not To Sprinkle. A Trustee’s power to sprinkle income or principal is not permitted in a Trust which is
intended to qualify for the marital deduction. As the estate tax personal exemption increases to $2.0 million on
January 1, 2006, there may or may not be enough property to fund a marital deduction trust. The flip side of
the larger exemption is that the Family or Credit Shelter Trust will be appropriately larger. This means that
there is more and more reason to consider providing that the Trustee has the power to sprinkle or spray
income among a defined group of family members. There are no adverse tax consequences from such a
provision, since the Marital Trust may be smaller or less significant part of the total trust assets of the
decedent.
Spouse as Trustee. It is more and more common now for the surviving spouse to be Trustee of the decedent’
s Trusts, both Marital and Family Trusts. If there is a single marriage, with one set of children, couples
generally want the surviving spouse to have complete control over the assets and serve as Trustee, with only
the restrictions on the Trustee’s powers that are required by income or estate tax considerations.
However, if there is a second marriage (or more) with the separate children of both spouses, I try to
encourage the use of an independent Trustee (non-family member) who will have power to control and
regulate the competing interests of the surviving spouse and the children of the decedent.
Even in the case of the singular marriage, there is often a gap of many years between the death of each
spouse, during which time the survivor can, and often does, remarry. This puts the children of the first
marriage in direct competition with the second spouse for the wealth of the initial survivor. A common
example: Mom dies, leaving a Trust. Dad is trustee. Dad remarries and has to re-write his trust to take care of
new spouse and his children. A sprinkle trust and an independent trustee is crucial in this situation.
Defining the Group. Not only is the selection of the Trustee having power to sprinkle or spray trust income (or
make discretionary principal distributions) important, but it is also vital to consider the definition of the group
of potential recipients. The natural inclination would be to limit that group to descendants. But what about the
spouses of a descendant? For example, a son predeceases the final termination of the Trust, leaving minor
children. Should the son’s widow be entitled to trust distributions to help manage and support the minor
children, rather than suffering the embarrassment of having minor children who are more wealthy than her?
These provisions get glossed over by many people, both estate planners and clients, who often look on these
provisions as "boilerplate". However, as we all know, the exact words of the Trust leap into importance when
questions are raised about specific factual circumstances after the Trust maker’s death. For example, is a
widowed daughter-in-law’s health emergency important to the family and the welfare of grandchildren?
Conclusion. The bottom line of this discussion is that the drafting of Trusts and estate planning in general is
becoming more and more family focused and less and less tax focused. This is true for most clients in our
part of the country, where we have retired individuals and couples with wealth of $5.0 million or less. If you
advise individuals or couples in these circumstances, you can help alert them to the importance of the
provisions of their Trusts and the need to make periodic reviews and revisions to reflect family values and
circumstances. The old boilerplate A-B Trusts are not sufficient in most circumstances anymore. If you have
clients who could benefit from experienced professional counsel in these areas, please do not hesitate to
call Jim Modrall or Dave Appleford at 231-941-9660.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
dims. Many times there are members of the family that the senior generation desires to benefit who are either
in the lowest income tax brackets or perhaps pay no income taxes at all. Students would typically fit into the
latter category with special education benefits that are available. Similarly, a widow or widower may find
herself or himself in a high income tax bracket and not needing more income to live on. Wouldn’t it make
sense for her or him to have some of the family taxable income shunted over to other family members where
the income tax bite might be less and the need for the income greater?
Sprinkle or Spray. Trust writers and practitioners typically use the words "sprinkle" or "spray" to refer to a
provision in a Trust which permits the Trustee to distribute income (a with it the tax liability) to and among
members of the family as the Trustee chooses. Such a provision is called a Sprinkle or Spray Trust.
The whole idea of such a Trust is to permit the Trustee to allocate taxable income where it can best be used
or where the tax impact may be less. In a "Family" or "Credit Shelter" Trust, established irrevocably at the
death of the Grantor of the Trust, a sprinkle or spray provision is quite common. The surviving spouse does
not even have to be a beneficiary, and it is certainly not required that the surviving spouse receive any or all of
the income.
Nonetheless, in the case of most married couples, where the surviving spouse will be dependent, at least in
part, on the Family Trust created by a spouse’s Trust, a sprinkle or spray provision is much less common,
even where the surviving spouse is Trustee.
However, in instances where both spouses have wealth, the power of the Trustee of a Family Trust to sprinkle
income among members a defined class, such as the decedent’s children, may provide an element of
flexibility that can be very helpful to family wealth preservation and tax planning.
When Not To Sprinkle. A Trustee’s power to sprinkle income or principal is not permitted in a Trust which is
intended to qualify for the marital deduction. As the estate tax personal exemption increases to $2.0 million on
January 1, 2006, there may or may not be enough property to fund a marital deduction trust. The flip side of
the larger exemption is that the Family or Credit Shelter Trust will be appropriately larger. This means that
there is more and more reason to consider providing that the Trustee has the power to sprinkle or spray
income among a defined group of family members. There are no adverse tax consequences from such a
provision, since the Marital Trust may be smaller or less significant part of the total trust assets of the
decedent.
Spouse as Trustee. It is more and more common now for the surviving spouse to be Trustee of the decedent’
s Trusts, both Marital and Family Trusts. If there is a single marriage, with one set of children, couples
generally want the surviving spouse to have complete control over the assets and serve as Trustee, with only
the restrictions on the Trustee’s powers that are required by income or estate tax considerations.
However, if there is a second marriage (or more) with the separate children of both spouses, I try to
encourage the use of an independent Trustee (non-family member) who will have power to control and
regulate the competing interests of the surviving spouse and the children of the decedent.
Even in the case of the singular marriage, there is often a gap of many years between the death of each
spouse, during which time the survivor can, and often does, remarry. This puts the children of the first
marriage in direct competition with the second spouse for the wealth of the initial survivor. A common
example: Mom dies, leaving a Trust. Dad is trustee. Dad remarries and has to re-write his trust to take care of
new spouse and his children. A sprinkle trust and an independent trustee is crucial in this situation.
Defining the Group. Not only is the selection of the Trustee having power to sprinkle or spray trust income (or
make discretionary principal distributions) important, but it is also vital to consider the definition of the group
of potential recipients. The natural inclination would be to limit that group to descendants. But what about the
spouses of a descendant? For example, a son predeceases the final termination of the Trust, leaving minor
children. Should the son’s widow be entitled to trust distributions to help manage and support the minor
children, rather than suffering the embarrassment of having minor children who are more wealthy than her?
These provisions get glossed over by many people, both estate planners and clients, who often look on these
provisions as "boilerplate". However, as we all know, the exact words of the Trust leap into importance when
questions are raised about specific factual circumstances after the Trust maker’s death. For example, is a
widowed daughter-in-law’s health emergency important to the family and the welfare of grandchildren?
Conclusion. The bottom line of this discussion is that the drafting of Trusts and estate planning in general is
becoming more and more family focused and less and less tax focused. This is true for most clients in our
part of the country, where we have retired individuals and couples with wealth of $5.0 million or less. If you
advise individuals or couples in these circumstances, you can help alert them to the importance of the
provisions of their Trusts and the need to make periodic reviews and revisions to reflect family values and
circumstances. The old boilerplate A-B Trusts are not sufficient in most circumstances anymore. If you have
clients who could benefit from experienced professional counsel in these areas, please do not hesitate to
call Jim Modrall or Dave Appleford at 231-941-9660.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |
| August 2005 SPRAY OR SPRINKLE - SPREAD IT AROUND by James R. Modrall III, J.D., C.P.A., David R. Appleford, J.D., L.L.M. (Taxation) |