Sprinkling or Spray Trusts

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 What is a Trust?

A trust is a legal device that allows the owner of property to make a transfer of that property. It also allows the owner of that property to have the property, which is referred to as trust assets, managed on behalf of another individual, known as a beneficiary.

The laws governing trusts vary by state. In general, a trust is an efficient way for individuals to transfer their assets in a way in which they are able to control and manage. For example, they may place certain conditions on the trust property, which must be fulfilled before the property is transferred to a beneficiary.

A common example of this is when a parent or grandparent sets up a trust for a child or grandchild that they can only access once they reach a certain age. Reaching the specified age is the condition that must be fulfilled.

What Can be Placed in a Trust?

As previously noted, one important element of a trust is that it contains assets or property. It is important to note that if an asset has a title, for example, stocks and bonds or a piece of real estate, the title to the asset must be transferred into the name of the trust.

There are certain types of items that do not have a title, including:

  • Jewelry;
  • Clothing; and
  • Furniture.

These items, however, may also be transferred into the trust by transferring the owner’s rights to the property to the trustee to be held for the benefit of the named beneficiary or beneficiaries of the trust. There are certain types of items that are not permitted to be transferred into a trust because the distribution of these items is determined by the beneficiary named in the individual policies.

These may include:

  • Life insurance policies;
  • Retirement accounts;
  • Pension plans; and
  • Health savings accounts.

If an individual wishes for these items to be placed into a trust, the named beneficiary listed for the policy must be the trustee.

What is a Sprinkling or Spray Trust?

A sprinkling trust, also called a spray trust, provides a trustee with broad discretion when determining the distribution of the trust. This means the trustee may release trust property to the beneficiaries when necessary.

Trust property is typically released in several smaller distributions, or a little here and a little there, as the circumstances dictate. In effect, the trustee is sprinkling or spraying the funds to the beneficiaries over time.

This type of trust is created when a settlor has great faith in the individual whom they have selected to serve as trustee, and they are confident that the trustee will make distributions as the settlor would or that the settlor would approve of those decisions that the trustee makes regarding the distribution of property or funds.

How Does a Sprinkling or Spray Trust Work?

Trusts are widely used asset management, estate planning, and tax planning tools that allow settlors to dictate specific terms and conditions to a trustee for the management and distribution of their property, with legal consequences if the trustee does not abide by those terms. If an individual seeks more flexibility with their asset distribution and more freedom for their trustee, a settlor may wish to create a sprinkling or spray trust.

What Responsibilities does a Trustee Have Regarding a Sprinkling or Spray Trust?

When an individual is named and legally receives the property in a trust, that trustee assumes a fiduciary relationship with the named beneficiary or beneficiaries, which includes a number of duties, such as:

  • Duty of care. A trustee is required to manage the trust property carefully until distribution. The trustee is required to exercise prudent judgment in any transaction or investment they make in order to to maximize profit and avoid losses;
  • Duty of loyalty. When dealing with trust property, the trustee cannot put their own interest before those of the beneficiaries. They are also prohibited from engaging in any self-dealing with trust property;
  • Duty of security. One of the prime reasons someone creates a trust is to keep certain funds or property safe. The trustee has the duty to keep it that way; and
  • Duty of segregation. The trustee is required to keep all trust property separate from their own. Any commingling of trust property with personal property may result in the removal of the trustee from their position.

There are also some additional duties with a sprinkling or spray trust, including the duties of accounting and investing. Trustees are required to keep track of all trust property and should attempt to invest it wisely for the benefit of the beneficiaries.

In a spray trust, the confidence and freedom of decision-making that the settlor provides to the trustee may mean they are provided more leeway than other trustees would receive. For example, while a trustee is required to keep track of losses, profits, and investments they make with trust funds or property, they may not be required to keep records with the level of detail that other trusts would require.

The main feature of a sprinkling or spray trust is that the settlor has such faith in the trustee that their decision-making is given wide latitude regarding the timing and amount of distributions. Spray trusts are often created for the benefit of a minor.

This is because a minor may not be old enough to make their own decisions with the property but will rely on it for several reasons, typically over many years. This type of trust allows the beneficiary to have access to smaller amounts of the trust assets as needed with the proper oversight.

What are Some Common Sprinkling or Spray Trust Disputes?

The freedoms which spray trusts provide may also give rise to conflicts as well. The most common conflicts involve the fiduciary relationship between the trustee and beneficiaries.

A beneficiary may challenge a trustee by claiming that the trustee overstepped their scope of authority or failed to authorize a required distribution. Additionally, a beneficiary may conflict with another beneficiary and claim unfair distribution or fraud.

A court will first examine the language of the trust document to resolve any issues which arise. The court may rewrite or add certain clauses if a section is unclear or a document cannot resolve the legal question.

It is important to note that, with these types of trusts, the powers granted to the trustee may make certain challenges difficult.

Do I Need an Attorney for a Spray or Sprinkling Trust Problem?

A sprinkling or spray trust is a very specific type of legal arrangement that may not be appropriate in every situation. If you find yourself involved in a conflict regarding a spray trust distribution or are seeking to bring one, it would be helpful to seek the advice of a trust lawyer.

Your lawyer will be able to advise you regarding trust formation and represent your interests in any litigation and negotiation situations. In addition, each state has different laws which govern estate planning and management.

Therefore, having the assistance of a local trust lawyer will help ensure your trust is correctly formed. If you are required to bring a claim related to a trust, your lawyer will represent you in court.

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