DEFINITION of Sprinkling Provision
Sprinkling provision within a life insurance agreement that allows the trustee of the policy to spread the death benefit around to the beneficiaries at his or her discretion. The sprinkling provision gives the beneficiaries who are in greater need of the funds the opportunity to receive a greater portion of the payout than if the funds were divided equally.
BREAKING DOWN Sprinkling Provision
For example, let's assume that a policyholder recently died and the individual has four children. Let's also assume that two of the children are financially well-off and that the others have recently entered into financial difficulty. The sprinkling provision that is embedded in the insurance contract would enable the trustee to attribute a significant portion of the death benefit to the children in need of the funds and give proportionally less to the ones who do not need the extra money.
How Sprinkling Works
This provision can be added to a life insurance policy, though this is also the province of trusts. In a trust, either the income or the principal can be allocated in this way. The income could be paid equally and the principal sprinkled, or vice versa. Both income and principal can be sprinkled, and at some future date and remainder can be distributed in equal shares. The trust can arranged to sprinkle until the beneficiaries reach a certain age, then to distribute equal shares of the remainder.
Another option is a Spendthrift Trust. This is a trust setup with "spendthrift provisions or clauses" that protect the trust assets and the beneficiary assets from creditors of the beneficiary. The trust is normally created to allow the trustee to control the distribution of the trust's assets to the beneficiary(s) in order to manage the spending habits of the beneficiary(s). The creator of the trust might also be afraid that the beneficiary would "blow through" the assets of the trust if a controlled budget and independent trustee was not in place to maintain stability.
It's important to pick the right trustee if you're contemplating a sprinkling trust. The trustee, sometimes a lawyer or member of a bank trust department, has broad discretion to disburse the funds. It's incumbent on that trustee to gain a thorough understanding of the family situation and to document the needs and resources of each family member, a daunting task. Trustees can also be a friend of spouse or other family member. You set the rules of the trust, but the trustee has a lot of power, so choose wisely.