Structuring Sprinkle Trusts to Minimize Income Tax Consequences to Trust and Beneficiaries

The changes to the estate and gift tax regime in the tax overhaul bill enacted in Dec. 2017 have made income tax minimization more important than ever for estate planners. With the estate tax exemptions drastically increased for at least the next eight years, the larger challenge for trust drafters is to avoid or defer income tax on trust assets and accumulation.

A powerful tool in post-mortem income tax minimization is using sprinkle or spray trusts as part of a distribution strategy to ensure tax efficient disbursement of trust assets.

Sprinkle provisions in irrevocable trusts allow the trustee to exercise discretion on how to distribute trust assets to beneficiaries. While most trust documents provide express guidance on which assets are to be distributed to which beneficiaries at specified times, a spray provision gives the trustee power to choose how and when to distribute assets to beneficiaries.

Most states require that discretionary distributions be made for the “health, education, maintenance and/or support” of beneficiaries. This HEMS standard is broadly interpreted to protect trustees; nonetheless, fiduciaries often face challenges when exercising discretion to make distributions. Estate and trust counsel should always draft trust documents to express the grantor’s intent and protect the trustee from unnecessary challenges.

Listen as our experienced panel provides comprehensive and practical details on drafting sprinkle provisions in trust documents to minimize income tax consequences.

1. Types of sprinkle trusts
2. HEMS standard (health, education, maintenance and support)
3. Key language that a sprinkle provision should contain
4. Using sprinkle trusts as an income tax minimization strategy
5. Risks to trustees in exercising sprinkle powers

The panel will review these and other key issues:

• What types of trust assets would see the most benefit from being subject to discretionary sprinkle distribution provisions?
• The limits of HEMS standards in granting trustee discretion in a sprinkle trust
• Evaluating beneficiaries’ tax situations and marginal rates in making distribution determinations
• Risks to fiduciaries in exercising discretion to make distributions under a sprinkle trust

Learning Objectives

After completing this course, you will be able to:

• Identify trust scenarios in which sprinkle trust provisions can achieve income tax savings through a distribution strategy
• Discern sample language that effective sprinkle provisions contain
• Recognize the possible risks to trustees in having and exercising sprinkle powers to make discretionary distributions

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, drafting wills and trust documents, supervising other attorneys or estate planners. Knowledge and understanding of the Uniform Trust Code, trustee fiduciary duties and beneficiary income tax issues.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.