A common pot trust is a box to hold property for the benefit of multiple people. It can give you added flexibility as to the way in which the trust assets are used, if you plan to leave your entire estate to your children, says Wealth Advisor’s recent article entitled “How Does a Pot Trust Work?”
We have three children who are four years spacing. Your youngest had not started college when our older two had already finished. It wouldn’t have been right to split assets three ways when your youngest still has college expenses coming.
This type trust is a called a discretionary, sprinkling, or common pot trust. It is a type of trust that families can use to pass on assets. Minor children serve as beneficiaries, with a trustee overseeing the management of trust assets. The trustee has discretionary power to decide how the trust funds are used to pay for the care and needs of beneficiaries.
Flexibility is key in family pot trusts, since the assets are distributed based on the children’s needs, rather than setting specific distribution rules as to who gets what. You might consider this type of trust over other types of trusts if: (i) you have two or more children; and (ii) at least one of those children is a minor. As long as the trust is in place, the trustee determines how trust assets may be used to provide for the beneficiaries’ well-being. This trust is designed to address the financial needs of individual children as they arise, and there’s no requirement for trust assets to be divided equally among them.
Common Pot trusts can offer an advantage to parents who want to make certain the needs of their children will be met in the event something happens to them. A common pot trust could provide money to cover basic living expenses and other costs that might arise. You can decide when the trust should end, based on the ages of your children, if ever. If all trust assets remain, children can still get distributions from the trust once it terminates.
However, common pot trusts don’t ensure an equal distribution of assets among multiple children. A family pot trust can also put an increased burden on the trustee because the trustee must in effect assume a parental role when it comes to financial decision-making. There’s no predetermined set of instructions left behind by the trust grantor.
Reference: Wealth Advisor (Aug. 31, 2021) “How Does a Pot Trust Work?”
