Some years ago an estate-planning tool that was widely discussed was the “sprinkling trust.” Proponents of the concept argued that this was the ideal way to distribute an inheritance among a group of heirs.
The idea was that the trustee could “sprinkle,” or distribute, income and principal to the heirs on the basis of their respective needs. The reasoning was that this is pretty much the way an estate owner would favor heirs if still living. The theory sounded great, but did it really work?
Most trust officers I have talked with agree that such arrangements created more problems than they solved. The major flaw in the sprinkling trust was that it tended to reward laziness and penalized or disinherited those heirs who were successful. The ne’er-do-well son or daughter seemed always to have needs the trustee was authorized to supportwhereas the successful heir, being self sufficient, was not eligible for a rightful share of the estate.
The unintended consequences of this kind of planning often resulted in bitterness and even litigation to alter the provisions of the trust.
Most, if not all, estate owners that I have dealt with encouraged their children to become successfulhence their support of college educations and business ventures. They also abhorred the idea of fostering or rewarding irresponsibility.
Of course, there were always exceptions where the heir was physically or mentally challenged, but such cases can easily be taken care of without cutting off the rest of the family.
At any rate, I have not heard much about the “sprinkling trust” in recent years and I believe it is because its execution was contrary to the idea that encouragement to be responsible citizens was a more important goal than providing a handout to those who shirked personal responsibility.
I thought about this flawed estate-planning principle when I read about the “Victim Compensation Fund” relating to the events of September 11. As I understand this piece of legislation passed by Congress and signed by the President, there are two objectives: first of all is the desire to compensate the families of persons killed in the disaster and also the people injured. The second objective is to choke off probable litigation that would surely occur in the aftermath of the tragedies.
Like the sprinkling trust, I believe this legislation is severely flawed and unless modified will create more problems than it solves, no matter how well intentioned it may be.
The legislation provides compensation for both economic and non-economic loss and on the surface appears to be generous. If indeed it becomes a viable alternative to tort litigation brought by the victims, it could also be a bargain for the government. However, it has a major flaw that could defeat the purpose of the bill.
The bill states that any such benefit a victim or family of a victim might be entitled to will be reduced by amounts they receive from collateral sources such as life insurance, pension funds, death benefit programs and payments by federal, state and local governments related to the terrorist-regulated aircraft crashes on Sept. 11, 2001.
In other words, those persons who assumed financial responsibility for their lives by buying life insurance and similar programs will be penalized, whereas those who ignored the perils of life and did nothing will receive the full benefit.
What a terrible message for a government to send to its citizens. At a time when we should be doing all that we can to encourage personal responsibility so as to produce a more stable society and relieve pressure on programs such as Social Security, to say you will be penalized for your good works is an outrage.
If a victim had followed the advice often given by many agents and purchased life insurance in the amount equal to eight times annual income, it is quite likely that there would be little or no benefits payable. It is interesting to note that the figures arrived at were influenced by existing federal programs (38 USC section 1967 and 42 USC section 3796) for compensating military personnel and public safety officers killed in the line of duty. I am not aware that these benefits are reduced by personal life insurance on the life of the victim.
In addition to being grossly unfair and a disincentive to personal responsibility, there are practical problems to consider. The legislation provides that if you are an injured victim or the personal representative of a deceased victim, you will, once a claim is filed, waive your rights to file a lawsuit against any entity seeking compensation for injury or death.
If people have their benefit eliminated or reduced substantially, then you dont have to be a genius to conclude they will not filethereby retaining their right to sue. The trail lawyers will certainly not miss this opportunity to clog the courts with endless lawsuits. In the event such lawsuits are successful and obtain large awards for the claimants, you can bet your bottom dollar those who waived their right will yell “foul” and claim they were coerced to give up their rights.
The “sprinkle” will turn into a deluge of the worst kind.
Reproduced from National Underwriter Life & Health/Financial Services Edition, February 18, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.