Setting up trusts is one of the most effective ways to provide for your children in your estate plan. Trusts offer numerous benefits, including flexibility in distributions, protection of assets from creditors, and safeguarding assets from division in a beneficiary's divorce. Additionally, they can help protect funds from being depleted by a beneficiary with substance abuse problems, gambling addiction, or poor spending habits.
Many parents’ estate plans involve splitting their assets into equal shares, funding separate trusts for each child. However, depending on your circumstances, pooling your assets into a single "pot" trust might be more advantageous.
Parents generally aim to avoid "playing favorites," so separate trusts may appeal to their sense of fairness. However, "fair" and "equal" are not always the same. Consider how you manage your funds now. If one child has a specific need, such as college tuition or medical care, you likely cover those expenses without feeling pressured to spend the same amount on your other children.
Your estate plan should be viewed similarly: fairness means addressing your children’s needs, not necessarily distributing your assets equally.
For instance, suppose you have two children, Stella and Lucy, aged 23 and 18, respectively. Stella recently graduated from college, and Lucy is about to start. You’ve already spent over $200,000 on Stella’s tuition and college expenses. If you were to pass away tomorrow and your estate plan divides your wealth equally between Stella and Lucy, Stella would come out ahead since she already benefited from $200,000 in college expenses. Lucy, on the other hand, would need to tap her trust fund to pay for college.
A pot trust can help continue meeting your children’s individual needs while avoiding giving one child an unintended windfall, as in the example above. As the name suggests, you pool assets into a single trust and grant the trustee full discretionary authority to distribute the funds among your children according to their needs.
Essentially, a pot trust allows the trustee to manage your money as you would if you were alive. If one child has substantial educational expenses or medical bills, the trustee can cover them, even if it means reducing other children’s inheritances.
For many families, a pot trust makes sense when children are relatively young and likely to have varying needs that can change over time. Your estate plan can specify that the pot trust be divided into separate trusts for each child at a certain point in the future — for instance, when the youngest child reaches age 21, 25, or another milestone.
For a pot trust to be effective, selecting the right trustee — and a backup trustee — is crucial. Your trustee should be trustworthy, impartial, and skilled in managing trust assets. Additionally, for a pot trust, it’s particularly important for the trustee to communicate effectively with the beneficiaries.
Distributions depend on each beneficiary’s unique needs, so the trustee must understand those needs, your objectives for the trust, and be able to explain the reasoning behind their decisions to all beneficiaries.
A single pot trust can offer flexibility and fairness in addressing your children’s needs, potentially being a more suitable option than multiple separate trusts. If you have questions about setting up a pot trust or need assistance with your estate planning, contact us today.
HoganTaylor estate planning professionals leverage their tax and business advisory expertise to help individuals accomplish goals and minimize tax burden. If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Estate Planning services, please contact Dan Bomhoff, Estate Planning Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.