People with children are often advised to set up a trust in their wills for their children. Most often, the will-maker divides the assets they wish to pass on to their children into equal shares, with each share funding a separate trust for each child.
In an estate plan, trusts for each child can provide many advantages, such as allowing you to name someone you trust to manage funds on behalf of minors or young adults. But in certain circumstances, establishing separate trusts from the start can have unintended consequences that seem less fair and inconsistent with how you raise your children.
Setting up a pot trust in your will may be a smart choice for you and your family if these considerations resonate with you.
What is a pot trust?
In a pot trust, multiple beneficiaries are listed within a single fund, such as your children. All your named beneficiaries would have access to a pot of funds. Trusts of this type are managed by trustees, who manage them for the beneficiaries benefit. A trustee can decide how assets are distributed among beneficiaries subject to certain legal obligations (called fiduciary responsibilities).
What are the circumstances in which a pot trust makes sense? It is most valuable to use a pot trust when there are nuanced or complex circumstances among your beneficiaries. In such situations, slicing up the pie in even amounts might be more theoretical than practical because they might differ in age, means, and needs, for example. Pot trusts can be helpful in the following situations:
- There are several years between the ages of your children.
- In the same way that you supported your children financially during your lifetime, you want them to have the same level of support after your death.
- If your children have unexpected needs, you want to be prepared.
- Communication with your children by your nominated trustee will be effective.
- When making distribution decisions for your children, you believe your trustee will consider your goals and priorities.
Pot trust example: For children who are several years apart
Let’s say you have two children, Ann and Roger. Ann is 22, and Roger is 17 when you pass.
At this point, undergraduate education has been paid for Ann but not for Roger. Dividing up your property in half won’t consider that Ann’s educational expenses and tuition resulted in a substantial benefit she has already received. When Roger starts college, he’ll need to use his trust funds to cover these costs. Comparatively to her younger brother, Ann will have received a windfall from you to use for discretionary expenses.
A pot trust is a great way to avoid this outcome. A pot trust would allow the trustee to consider that Ann’s education had already been paid for and then make distributions to Roger for the same purpose. Additionally, you can provide in your will that the pot trust should terminate at a certain age (such as when your youngest child reaches 25 years old), which then should be divided into equal trusts. When all your children’s undergraduate education expenses have been paid, a separate trust for each child may make sense.
Consider the scenario where one of your adult children comes to you with a compelling business proposal and asks for your assistance. If the idea is reasonable and you support their entrepreneurial endeavors, you may decide to provide them with financial aid. Since your other children may not require the money at that moment, your decision is unlikely to be influenced by whether you give them the same amount. A pot trust can be used similarly by assessing needs and wants and making a reasonable decision about how to distribute funds among your children.