All in the Family: Planning with Sprinkling Trusts
Each sibling, they say, experiences a different family.
That’s true for their parents too, as they watch each of their children grow as individuals, so different from their brothers and sisters, no matter how close in age or how much the parents strive to treat them equally. And just when parents think they have figured out each child, they can change again, as subtle differences in temperament and experiences compound. The valedictorian wants to take a gap year or more to travel with his band; the athlete is injured; a hitherto easygoing child starts to struggle – anything can happen. So how can parents (and grandparents) of more than one child plan accordingly?
This subject – fair versus equal in wealth management – has many important aspects, all worth considering in depth. (See below for links to some of our related recent publications and webinars.) But let’s concentrate here on one potential solution, for parents and grandparents considering their estate planning. A family sprinkling trust, also known as a pot trust, provides a way for grantors to benefit a class of individuals – typically children, grandchildren, and further descendants – assigning funds to a class of people instead of to specific individuals. It’s a pooled family asset, available to each member according to their needs at the discretion afforded to
the trustee(s) by the grantor.
Fair versus Equal: Recent related webinars and publications
- Enough, but Not Too Much: Raising Independent Children in an Affluent Environment — Password to view: YL$7n&.A
- Special Needs: Protecting the Whole Family with Wealth Planning — Password to view: 6jck$cfT
- Gifting and Letting Go: The Emotional and Practical Aspects of Wealth Transfer — Password to view: 53+ayGWY
- “Equal or Equitable: What is Fair?” by Jeff Maurer
- “Lending Support & Advice to the Next Generation” by Jeff Maurer
- “Health & Wealth” by Jeff Maurer
- “Encouraging Next-Generation Success” by Jeff Maurer
- “Special Needs Trusts: Protecting the Whole Family with Wealth Planning” by Karen Francois and Jay Springer
- “Gifting and Letting Go: Emotional and Practical Perspectives” by Justin Miller
Typically, parents and grandchildren set up a sprinkling trust to make gifts to very young children, who will likely not need to access the trust assets or income for some time. (The trust can also provide for the surviving parent in the class.) While the trust could remain a single pot forever, it will more likely remain collective until the ages by which the children will have likely completed their educations and begun their careers and families of their own. At that time, the trust could be split, or divided into separate trusts – for each child, their descendants, and their spouses – as the grantors see fit. Or the sprinkling trust could remain intact, to accommodate careers with very different earning potential, for example. The investment banker and charity worker are likely to face different challenges – although, again, anything can happen.
In the interim, the trust structure allows a young family to adjust for different and changing circumstances. A child with special needs will almost certainly require relatively more support. But other differences could be appropriate reasons to disperse funds; for example, one child may really benefit from private school while the other is thriving at public school, at least for now.
Sprinkling trusts can be very helpful for blended families, in which children may be spaced farther apart in age. The structure allows for the younger beneficiaries to access funds for education and other needs that may have already been met for the older children. The distribution won’t be equal, but it will be fair. A Connecticut-based couple discovered that recently, when they set up a sprinkling trust for their blended family, with five children spanning seven years in age, two with mild development disorders. The couple decided that a sprinkling trust benefiting the survivor and all the children until the youngest reached 30 years old made the most sense. At the death of the survivor, the balance of the trust (provided the children are all 30) will continue in separate trusts for each of their children and, secondarily, for their children, with the same provisions.
This couple’s trust, like most well drafted trusts, allows for an independent trustee to make discretionary allocations as needed, to protect each member and maintain family harmony. Many families opt to include a Limited Power of Appointment in their planning documents. This allows for the primary beneficiary, say a surviving spouse, to appoint the shares unequally or in different trusts that meet changed circumstances. The situs of the trust is also important. Delaware situs trusts can provide even more flexibility, allowing a specially appointed person (a “trust advisor/protector”) to make changes during the term of the trust that would accommodate needs that were unknown when first drafted.
Trusts also need to be properly managed. Investment and management decisions for a trust designed to serve children and potentially future generations generally shouldn’t be that dissimilar from a thoughtful, sophisticated, goals-based investment process. Risk/return trade-offs, cash flow requirements, and income tax status need to be evaluated much like an advisor would do for individuals. Investment vehicles that were once the preserve of institutional investors can now be used to complement the overall strategy of the trust and to grow wealth as well as to protect it.
Most important, the trust is flexible; it can change as the family’s circumstances evolve, as they surely will. The valedictorian’s band tour could become the start of something big – or an anecdote in a life well lived. And his siblings will have their own – and likely very different – setbacks and successes. The trust needs to be flexible enough to honor its stated purpose, but also the true intent of the grantor, to treat the children fairly. A fully discretionary trust that will last for generations, places a lot of responsibility on trustee(s) now and in the future. Future trustee(s) must be able to carry through the intentions of the grantor(s) in making disbursement decisions across an expanding class that could potentially threaten family harmony.
All told, sprinkling trusts are a good solution for many families. They provide protection for potential spendthrifts, from creditors (including divorcing spouses), and for family members with special needs. They also provide a vehicle that can be sheltered from future federal estate and generation-skipping taxes, subject to very careful consideration.
Finally, keep in mind that the current federal estate, gift, and generation-skipping tax lifetime exemption is now $12.92 million, or double that for a married couple, but is scheduled to revert in 2025 to about $6.2 million, indexed for inflation. Transfer strategies should only be executed in the context of long-term plans, but there is good reason now to accelerate those plans.
Kate Mulvany is a Partner and Wealth & Fiduciary Advisor at Evercore Wealth Management. She can be contacted at firstname.lastname@example.org.
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