Pot Trusts: Why They’re the Fairest (Trust Structure) of Them All

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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?

It depends.

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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.

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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 haven’t yet paid for Ben’s. If your estate plan simply divides your property in half, it won’t account for the fact that Alice already received a substantial benefit in the form of tuition and related educational expenses. But when Ben starts college, he’ll need to cover these costs by drawing from his trust funds. In a sense, Alice will have received a windfall from you to be put toward discretionary expenses when compared with her younger brother.

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Setting up a pot trust is a great way to avoid this result. A pot trust would allow the trustee to take into account the fact that Alice’s education had been paid for, and then make distributions to Ben for that same purpose to create a fairer outcome. You can also provide in your will that the pot trust should terminate at a set age (like when your youngest child reaches the age of 25) and then be split into separate equal trusts. At that time it’s likely that expenses such as an undergraduate education have been paid for all your children, and a separate trust for each child may then make sense.

3 more pot trust examples: Preparing for the unexpected

Imagine one of your adult children comes to you with a compelling business proposal and wants your help to move their idea forward. Assuming the idea is reasonable and you support their entrepreneurial endeavors, you may decide to provide the financial support they need to get started. It’s unlikely that your decision will be based on whether you've given your other children the exact same amount of money at that very moment, since they may not currently be in need of those funds. A pot trust can be used in the same way: to mirror how you’d distribute funds among your children by assessing needs and wants and then making a reasonable decision.

Similarly, let’s say one of your children is independently wealthy and another child is a teacher who lives on a modest income. If your second child comes to you with a request to help pay for a family vacation to celebrate a special milestone (like an anniversary), you may be glad to be a part of this celebratory moment. You’re also unlikely to feel compelled to write your wealthier child a check; assuming you’re generally communicative and transparent with both children, they, in turn, are unlikely to expect you to.

So, how does a pot trust help in this scenario? A pot trust would allow the trustee to determine that helping one child pay for a reasonable family vacation is sensible and distribute trust funds accordingly. With separate trusts of equal value, there’s no accounting for your children’s unique circumstances or needs.

A pot trust can also help address the unexpected, such as an illness or disability, which can lead to costly medical bills and related expenses. If one of your planning objectives is to ensure these types of expenses are provided for, a pot trust can be a very sensible tool in reaching that goal. Even if the pot of available funds is not that large, you may prefer to relieve one child of potentially burdensome medical expenses first and foremost, making any remaining funds available for the discretionary expenses of all children.

A caveat: Be thoughtful about choosing a trustee

Estate planning takes a lot of thought, and there’s no one right way to plan your estate — including if you have multiple children. That said, if your children are several years apart in age or you want to account for life’s unpredictabilities, incorporating a pot trust into your plan may help further your estate planning objectives.

If you decide to set up a pot trust for your children, be sure to select a trustee who you feel comfortable will communicate effectively with them. Have a discussion with your trustee about your goals and expectations, including how and for what purposes you’d prefer that trust funds be disbursed to your children. For example, make it clear if a child’s ability to attend the college of their choice or to pursue a nontraditional career path that they feel better aligns with their interests is particularly important to you.

In addition, make sure the trustee feels comfortable assuming the role, and assure them that they should not feel pressured to do so. Finally, you’ll want to name one or more alternate trustees of the pot trust in case your first choice is unable to serve.

Takeaway

Each family has unique circumstances and needs, and there are different types of trust structures to help account for that. Take into consideration what your familial situation might call for in your estate plan, and try to be thoughtful: Equal isn’t always fair.

Life is full of nuances, and an estate plan that makes room for that inevitability can help protect and provide for the people who matter most.

Remember, You’re Worth More Than Your Money

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Allison L. Lee is the Attorney-at-Law, Director Trusts & Estate Content for FreeWill, a mission-based public benefit corporation that partners with nonprofits to provide a simple, intuitive and efficient online self-help platform to create wills and other estate planning documents free of cost. Through its work democratizing access to these tools, FreeWill has helped raise billions for charity. Prior to joining FreeWill, Allison spent more than a decade in private practice.