Pot Trust Gives You Flexibility: Learn the Pros & Cons

Unlike wills, which are a straightforward way to distribute assets to heirs and beneficiaries, trusts typically offer a wider range of benefits. Choosing the right trust depends on your needs, and a pot trust is one of the most popular types when it comes to flexibility for parents of minor or young adult children.

While most trusts are designed to split assets relatively equally between children, pot trusts are flexible and distributed at the discretion of the trustee, ensuring that the funds are allocated based on each child or beneficiary’s actual financial need, rather than an equal division.

While this can serve as a general guide to pot trusts and their benefits (and cons), always discuss your final estate plans with a licensed, experienced estate planning lawyer before choosing this option over other types of trusts.

Pot Trust 101: A Smart Estate Planning Tool For Young Families?

Pot trusts are typically a wise choice for individuals or couples:

• With two or more children.
• Where at least one of the children is still a minor.
• With children who are still young adults, in college, etc.
• Who plan to leave the entirety of their estate to the children.

Of course, children grow up and family dynamics shift over time. If you create a pot trust, it’s a good idea to review your estate plans annually. At some point, when your children are old enough, you’ll want to meet with your estate attorney to dissolve it or morph it into a different type of trust.

The trustee selection is critical to the trust’s success

Choosing the right trustee is always critical, but it’s essential when dealing with a pot trust. These trusts can become a nightmare for the trustee if you haven’t done your due diligence ahead of time.

Here are some of our time-tested recommendations for pot trust trustees:

• An adult sibling may not be the best choice as trustee.
• Choose someone who is impartial and has no financial interest in the trust.
• It can be wise to choose a non-family member so tensions/conflict are kept outside of the immediate family.
• Make sure the person is 100% willing, has met with your attorney, and understands all of their responsibilities (including annual tax filings until the trust’s termination date).
• Select someone who is financially savvy.
• Select a backup trustee in case something happens to your first choice or life circumstances render them unable to manage the trust responsibly.

We can help you determine who might be the best fit for the trustee responsibilities. In some cases, your estate attorney is the most logical trustee choice because this keeps things 100% neutral and outside of the family dynamics.

What is different about a pot trust?

Here are some ways that pot trusts differ from more traditional trust options.

1. All of your assets are pooled into one “pot.”

This is how the trust got its name. Unlike other trusts that may compartmentalize or have specific instructions for specific assets, pot trusts pool them all together. From there, they are distributed as needed by the trustee.

2. There isn’t a set allocation percentage per beneficiary.

Most trusts allocate a specific percentage of the trust or amount per beneficiary. In pot trusts, the amounts provided for the beneficiaries (typically children, step-children, or other dependents). Children’s financial needs vary over time and depending on specific situations.

So, for example, the trustee would use the pot trust for:

• A child’s medical bills after an accident, hospitalization, or any other event that stretches beyond the normal annual medical expenses.
• To help with college tuition, trade school fees, etc.
• Braces (which one child may need while another may not).
• Fund extracurricular interests or events.
• And so on.

3. The trustee can be different from the guardian

Let’s say that the person/couple you’ve selected to be the legal guardians for the children after you die is not necessarily the most financially frugal or sound. In this case, the pot trust is a wise method for ensuring your children can be with the person/people with whom they’ll feel the safest, loved, and seen (or who you know will take the best care of them) without worrying about the financial aspects of the arrangement.

Those can all be handled by the pot trust’s trustee using whatever methods or protocols make the most sense for the situation. Your estate planning attorney can help you establish this and can also meet with you, the prospective guardian(s), and the trustee to ensure everyone is on the same page.

4. You determine when the trust is terminated

Because pot trusts are established to pool resources for minor and young adult children, most have a termination date. You can set that date for anything you wish. Most clients determine a specific age at which the trust ends, such as when the child is 18, 22, 25, etc.

At this point, once the last child reaches the termination age, the trust can be shifted to another type of pre-established trust, or you can simply divide the remaining assets evenly among your children. However, let’s say the termination date for the pot trust is when the last child turns 18 or 25. In that case, you may want to set up a child-specific trust that protects those assets until they are older (and wiser) about managing access to lump funds.

5. They allow you to balance asset distribution in a before/after scenario

Let’s say that you have a 13-year-old son and a 22-year-old daughter. While your son is only beginning to think about things like driving, high school club sports, and college, your daughter has already reaped the financial benefits of thousands of dollars spent on all of those to date.

If you were suddenly killed in a car accident, and you split the assets evenly, your daughter would have had a significant advantage. In this example, a pot trust would even out that financial gap for your son until he reaches the age the pot trust extends to, at which point the assets are divided equally.

The downfalls of using a pot trust

There are certain negatives associated with pot trusts. Your estate planning attorney should do their best to mitigate these during the creation of the trust before encouraging you to move forward. Some of the downfalls can include:

• Adult (or older, minor) children feeling resentful that they don’t have access to the trust until a younger sibling ages out. However, in “real life,” it’s extremely rare that financial allocations are identical between children anyway. Frontloading age-appropriate communication between siblings or immediate family ahead of time can help alleviate this.
• Children who have aged out of the trust may feel resentful because their assets are virtually frozen until the youngest child reaches the trust’s termination date. This scenario can be alleviated by creating individual trusts for children who are nearing or have already “aged out” of the pot trust.
• Conflict or tension within the siblings or extended family about discrepancies in who got what (i.e. child X is getting more money than child Y, etc.). This can happen unexpectedly if one child becomes seriously ill, injured, or requires significant medical or mental health funds, etc.). NOTE that a pot trust is not used the same way as a special needs trust.
• Complications may arise if you have a blended family or a less-traditional family unit.
• Trustee burnout (which is why the trustee selection is so important).

Learn More About the Pros & Cons of Pot Trusts With Tseng Law Firm

Would you like to learn more about pot trusts and other estate planning tools to support your young family in the event of an unimaginable occurrence? Schedule an estate planning consultation with Tseng Law Firm. We have years of experience helping Bay Area families determine which trusts and estate planning tools are the best fit for their needs.

We look forward to providing your family with future security and invaluable peace of mind.