What is a Common Pot Trust?
A common pot trust is a flexible estate planning tool for parents of minor children. A common pot trust gives discretionary power to the trustee to decide if and when a distribution should be made. The philosophy behind the common pot trust is that, while at least one of the children is underage, the trustee should make distributions to children in the same manner as the parents would have, had they been alive. This typically means that distributions will be made based on need, not necessarily equality. It approximates what the parents would do if they were still living.
When using a common pot trust, the trustee manages the trust assets for the benefit of all the children, which means that he or she can spend trust funds on each child as needed, and there is no requirement that expenditures amongst the children are equal.
Normally, with this type of trust, the trust assets are distributed amongst all beneficiaries when the youngest child reaches age 18. As the parent establishing the trust, you can specify that the trust is to end when the youngest child reaches a different age, say, 21 or 25.
Here’s an Example:
Let’s say parents have two children. One child was born with a perfect smile, perfect teeth, and healthy bite, and never required orthodonture. Your other child was born needing expensive extensive corrective orthodontics. The trustee can spend a portion of the trust assets to meet this need, without having to spend the same amount of money on the other child. The focus is on fair, not equal, and attempts to replicate what parents would do had they been alive.
What Are the Advantages of a Common Pot Trust?
It takes care of a child’s unforeseen needs, like getting an injury while playing a sport and needing money for medical bills. The trustee then can give funds to the specific child’s needs when they see fit.
It mirrors what you likely would have done had you been alive to manage your family assets. The trustee may spend more funds for one child than another. Equality does not necessarily mean fairness. Some of your children may have already reached adulthood and are already financially stable, while you still might have a minor who needs additional financial assistance to make it to adulthood. This type of trust ends as soon as the youngest child reaches a certain age. At that time, what remains is split evenly between the beneficiaries even though one may have received more assets at that time. (It’s important to note - even though all children must wait for the youngest to reach adulthood before the trust ends, funds needed for higher education or other purposes may still be distributed by the trustee for any of the children.)
A common pot trust is easier to administer and less costly. A common pot trust is a single trust used for all children. This trust can be monitored by one trustee. If you have very young children who will need financial assistance for many years until adulthood, a common pot trust can make trust administration easier. The cost of maintenance may also be less since it is only one trust to administer.
What Are the Disadvantages of a Common Pot Trust?
Each child may not receive the exact same amount of funds. The funds within the trust are not split between the children, but are available to be shared until the youngest reaches a certain age. The trustee may spend more funds on one child than another, if needed. This can be beneficial if any of the children has special medical needs, differing educational needs, or unanticipated needs. However, the older adult children cannot cash out on the trust until the youngest child has reached adulthood. This might be after almost all the money has been drained from the common pot trust. The common pot trust will be divided up into equal parts for the children when the youngest child attains a specified age. This attempts to simulate what parents would do, had they been alive. They continue taking care of their young children’s’ needs with their resources even after the older ones are out of the nest. If there’s a wide gap in the ages of the children involved, and you feel this is not equitable, a common pot trust might not be the best option.
Another potential disadvantage of a common pot trust is the increased demands that it may place on the trustee. While the trustee has discretion and flexibility when it comes to making expenditures on each child, he or she also might be faced with particularly difficult choices in attempting to balance the needs of all the children involved.
Summary
The overall purpose in the common pot trust is to take care of your family in the best way possible. If both parents are tragically lost, leaving minor children, then the trustee is given discretion to spend the money as if he or she was a surrogate parent. The trustee will be able to spend the money as the parents would if they were alive.
The common pot trust may be the solution that makes sure the money you leave to your loved ones goes to those who need it the most. While a common pot trust offers many benefits, it may not be the right option for your family. Every estate planning situation is different and requires an independent analysis of the specific facts and circumstances involved.