Many trust and estate attorneys recommend that people with children set up trusts for their children in their wills. A common approach is for the will-maker to structure their will such that the assets they wish to pass on to their children are split into equal shares, with each share used to fund a separate trust for each child. After all, this would seem to be the fairest plan — right?
Trusts for each child can provide many advantages in an estate plan, including the ability to name someone you trust to manage funds on behalf of minors or young adults with limited financial experience or acumen. But in certain circumstances, setting up separate trusts from the outset can have unintended consequences that seem less fair and less consistent with the way you treat your children during your lifetime.
If these considerations resonate with you, setting up a pot trust in your will may be a smart choice for you and your family.
What is a pot trust?
Generally speaking, a pot trust is a type of trust that lists multiple beneficiaries, such as your children, within a single common fund. Imagine a pot of available funds for all your named beneficiaries. Like other trust types, the pot trust is managed by a trustee, who is responsible for managing the trust for the benefit of the beneficiaries. Subject to certain legal obligations (called fiduciary responsibilities), your chosen trustee has the authority to determine how assets are distributed among your beneficiaries.
So when does a pot trust make sense? A pot trust is most valuable when there’s some nuance and/or complexity among your beneficiaries’ circumstances. They might differ in age, means and needs, for example, and in such situations, slicing up the pie equally might be more theoretical than practical. Some specific instances where pot trusts could be helpful include:
- You have children who are several years apart in age.
- You want your children to be financially supported after your death the same way they were when you were alive.
- You want to be prepared for your children’s unexpected needs.
- You are comfortable that your nominated trustee will communicate effectively with your children.
- You believe that your trustee understands your goals and priorities for your children and will consider them when making distribution decisions.
Pot trust example: If your children are several years apart in age
Let’s imagine you have two children, Alice and Ben. Alice is 22 and Ben is 17 when you pass.
By this time, you’ve already paid for Alice’s undergraduate education. You …….