A Guide to Pot Trusts
If you’re looking for a solution that allows you to exercise equity over equality, consider setting up a Pot Trust.
Trusts are a powerful tool that allow you to set aside assets for your loved ones. Not only are these assets protected from the probate process, creditors, and certain taxes, they allow you to control the manner in which funds are distributed. Most Trusts are set up in such a way that each beneficiary inherits equal slices of the pie. However, what if your children have varying financial needs? What if one of your children runs into unexpected expenses and needs more than an equal share of financial support? If you’re looking for a solution that allows you to exercise equity over equality, consider setting up a Pot Trust. Trust & Will explains.
What is a Pot Trust?
A pot trust is a type of Trust that lists out multiple beneficiaries for a single pool of assets. Pot trusts are typically set up by parents for the benefit of their children, in case anything unexpected were to happen. The common pot Trust gives discretion to the Trustee to distribute funds as they see fit to meet the needs of the beneficiaries.
Pot trusts can be a great solution for parents who want to protect the financial needs of their children. It is convenient because it allows you to set up a single fund that can benefit multiple beneficiaries. You can have peace of mind knowing that your children will have access to financial support as needed if anything were to happen to you. The Trustee will have the flexibility to make decisions on how funds should be used, such as to pay for medical expenses or college tuition. The fund does not have to be distributed equally to each child at a specific time. Rather, it can be used as a type of reserve fund that is used on an as-needed basis.
What is a Single Pot Trust?
The terms “single pot trust” and “common pot trust” are used interchangeably, and mean the same thing as a pot Trust. The terms indicate that a single “pot” of assets, or a single fund, is set up for the future benefit of multiple beneficiaries. In other words, more than one beneficiary, such as your children, will each share a single fund.
What is the purpose of a Pot Trust?
There are several types of Trusts to choose from, with each type offering unique advantages over others. However, in most cases, Trusts are set up in such a way that beneficiaries receive equal distributions, or equal slices of the pie, if you will. Predetermining how funds should be distributed amongst your beneficiaries is often better in theory than in practice.
For instance, children often have differences in age, needs, and circumstances. This creates nuances and complexities that impact their financial demands. By setting up a pot Trust, you are allowed to choose a Trustee who is given the discretion to distribute the fund assets amongst your children as they see fit. Distributions may not necessarily be made in an equal manner.
For example, one of your children could develop an illness that requires ongoing medical care. The Trustee could use the pot Trust to cover their medical expenses without having to set aside an equal amount for each of the other children.
In other words, pot trusts are often used by parents who have multiple children. They foresee that their children may have varying needs and want to set aside a reserve of funds that does not have to be distributed equally amongst them.
Here are some additional scenarios in which a pot trust might be used:
You wish for your children to continue having ample financial support if you were to pass away.
Your children vary in age and are in different stages of life.
You want your children to have access to financial support when unexpected needs arise.
You’re confident that your chosen Trustee will exercise their discretion wisely and will do a good job of weighing each child’s needs when distributing funds.
You feel that your chosen Trustee will communicate effectively to your children regarding their decision-making.
Pot Trust example
Here is an example that illustrates how a pot Trust can be used effectively. In this example, let us pretend that you have two children, Jane and Toby. When you pass away, they are 33 and 27, respectively.
At this time, Jane and her partner had their first child. You had thrown them a baby shower, and provided them with several generous gifts from their baby registry. Further, you helped Jane set up a college saver account for your grandchild and even funded it with $5,000 to help get it started.
As it turns out, Toby and their partner are very early in their pregnancy and have not announced it to anyone yet. Had you been alive for their pregnancy journey, you would have done exactly the same things as you had done for Jane and her baby. Unfortunately, you pass away before learning about the pregnancy.
Had your estate plan simply instructed the Trustee to divide your property and assets in equal halves between each of your children, the outcome wouldn’t necessarily be fair. This is because Jane and her family already received substantial benefit from you as described above. You could even argue that Jane is receiving a windfall. Because you already covered a significant amount of her baby-related expenses, her inheritance can be used up to her discretion. In contrast, Toby will have to draw from his own funds or his Trust funds to cover the financial support you would have otherwise gifted him.
Let’s say that you had set up a Pot Trust instead. This allows the Trustee to evaluate the fact that Jane had already received significant financial support when she first brought her baby into the world. Now that Toby is undergoing the same experience, the Trustee can make distributions out of the Pot Trust. As a result, Toby receives the same financial support that Jane once received.
While Toby and Jane’s inheritances aren’t necessarily equal, thanks to the discretion of the Pot Trust, they will have equitable access to financial support during life events (major or minor) despite your passing.
What are the advantages of a Pot Trust?
A Pot Trust is often used by parents who have multiple children and wish to leave flexible financial support in case something were to happen to them. Here are the unique advantages of the Pot Trust:
Can help cover the basic living expenses of each child
Can extend a helping hand if a child can’t cover an unexpected expense
Can help create financial benefit for younger children that older children already received during your lifetime
Gives the Trustee the discretion to determine how funds should be used
Can set conditions for when the Trust should terminate and how remaining assets should be divided
What are the disadvantages of a Pot Trust?
While there are many advantages associated with a Pot Trust, there are some disadvantages to carefully consider:
Does not guarantee equal distribution of assets amongst each of your children
The fairness of how the pot trust is used is subjective and requires the holistic evaluation of the Trustee
One child may receive a disproportionately larger share of the pot trust if they have more expenses relative to the other children (i.e. if they have special needs or have an ongoing medical issue)
Can burden the Trustee with difficult decision-making
Children may not necessarily understand or agree with Trustee’s decisions
Children have to wait until the youngest child reaches a predetermined age before the Trust can be terminated and assets are distributed
Create your Pot Trust today
A Pot Trust is a special type of Trust that allows you to set up a single fund with multiple beneficiaries. Pot Trusts allow you to choose a Trustee who has the discretion to decide how the funds should be used. Based on these two conditions, a Pot Trust is a popular solution for parents who have two or more children and realize that their financial needs are not only nuanced, but difficult to anticipate. Simply splitting an estate equally amongst each child isn’t necessarily equitable. This is especially true when the older children have received more financial benefit from their parents before they passed away. By including a Pot Trust in the Estate Plan, the parents can have peace of mind knowing that the Trustee will use their best judgment to provide financial support for each of their children on a flexible, as-needed basis.
Know that the common Pot Trust is just one example of many different types of Trusts that can be utilized. For example, a Testamentary Trust allows you to arrange funds that will be distributed to your children after they meet your requirements, such as graduating from college or finding gainful employment. If you’re worried about a child’s spending habits, you could instead set up a Spendthrift Trust. This type of Trust prohibits the beneficiary from having direct access to funds and thus protects them from their own irresponsible spending behavior.
Trusts are a powerful estate planning tool that allow you to exercise control over how your assets should be distributed after your passing. Whether you elect to use a Pot Trust or other type of Trust, you get to decide how your loved ones will receive their inheritances. This is especially advantageous when the default outcomes determined by probate law are not desirable.