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Pot Trusts: More Equal Than Equal?


When I ask parents of young children how they want to divide their estate among their children, the answer is usually “equally”. Sounds fair. In most cases, we desire to treat our children equally. But, particularly for young families, if you either fail to plan or if you only create a simple “upon my death divide into equal shares” estate plan, the end result might not be equal.

What would we have done?

What most parents want, particularly those with minor and/or young adult children, is to plan a post-death arrangement that will most closely mimic what they would have provided for their children. Immediate division upon death into equal shares might not accomplish this goal.

Example: You have three children: Adam (age 22), Barbara (age 16) and Charlie (age 12). You’ve already paid $150,000 to put Adam successfully through college (yes, it’s expensive). You plan to do the same for Barbara and Charlie, but you pass away unexpectedly. You’ve provided in your trust to divide your ($600,000) estate into equal shares for your children; each child’s share is funded with $200,000. Barbara attends University of Illinois and uses $100,000 of her trust for college. Six years later, Charlie attends Northwestern. College costs Charlie $200,000 (if you think college is expensive now, just wait six years).

Do you see the problem?

At the end of the day, the older children are advantaged (because you’ve already paid for their education and other costs during your life). Likewise, children with lesser expense benefit. Charlie’s entire inheritance was consumed by college costs, while Adam is free to spend his $200,000 as he sees fit.

Does this mimic what you would have provided if you were still around? Not likely. You probably would have paid for your minor children’s expenses and college costs from a common fund (your money), at least until each child had reached a certain age (e.g. 21).

Enter the pot trust

Instead of immediately dividing the trust into “equal” $200,000 shares upon death, the entire trust is held as one fund for all of your children until the youngest reaches a designated age (typically a post college age like 22 or 23). Up until that time, the designated trustee is given discretion to ‘sprinkle’ distributions from the trust for any of your children based on need. The primary purpose may be educational, but you might give the trustee broad discretion in providing for your children.

The same kind of discretion that you would have exercised.

Once the youngest child reaches the designated age, whatever is left in the pot trust at that time is divided into equal shares for your children. In my example, after paying college costs, the $600,000 is now $300,000. Each child ultimately receives $100,000. This closely mirrors what would you would have done, and in many situations is a more equitable result, I think.

Some additional notes and considerations:

  • Terminology. Pot Trust might instead be called “common family trust” or “one fund trust” or “children’s trust”.
  • Pot Trust as Sub-Trust.  The “pot trust” isn’t a separate document. It is typically created as a ‘sub-trust’ within the terms of a comprehensive revocable living trust.
  • Mind the Age Gap.  Consider that if your oldest and youngest child are many years apart in age, the oldest will not have full access until an advanced age (e.g. for pot trust until 22, if age gap is 15 years the oldest will be 37 at division).
  • Size Matters.  You might not think you have enough funds to justify a pot trust. But, consider life insurance. The pot trust can be a very useful way of managing the proceeds from life insurance policies. However, if the trust is modest and you have several minor children, consider whether college costs for the older children might deplete the funds before the younger children reach college age, in which case dividing into separate dedicated shares might be a better option.
  • Flexible Terms.  The terms you create for your pot trust are flexible. It’s not one-size-fits-all. For example, you might want to give your trustee the discretion to make advancements to older children (that are subtracted from their ultimate share) to buy a first home or to start a business.
  • Select Trustees Carefully.  Consider trustee designation and succession carefully, keeping in mind that the trustee may have some difficult decisions to make in allocating unequal distributions among your children. You may name the persons designated as guardian also as trustee, or you might instead name someone else for an added layer of review and involvement.

If you think a Pot Trust might benefit your family, contact your estate planning attorney to discuss whether it’s a good fit for your estate plan. Please visit The Law Offices of Jeffrey R. Gottlieb website for more information on wills and living trusts.

One Comment

  1. Amy says:

    What a wonderful tool! I can’t wait to share this with the rest of my firm.