Common “Pot” Trusts: Why You Shouldn’t Treat Your Children Equally

June 29, 2011
300px Children dancing10 Common “Pot” Trusts: Why You Shouldn’t Treat Your Children Equally

Image via Wikipedia

If you have minor children, you most likely would want them to be provided for in case something terrible happens to you and your spouse.  How would you split your assets between them?

At first glance, your natural tendency is probably to respond, “equally, of course”.  For the most part, we love our children equally, and so logic dictates that they should receive equal amounts.

But consider this — Do you know for certain that you spend equal amounts on each child?  Or do you rely on faith that as extra-curricular activities, doctor visits, gifts, etc. come up throughout your kids’ lives, everything kind of washes out?  Most would answer yes to the latter and not the former question.

On the other hand, pure equality can be a harsh mistress.

Do you deny your son a doctor’s visit if he has already gone three more times than his sister in the last six months?  If you spent a little bit extra on your daughter’s birthday party, do you skip this year’s dental check-up?  If your son broke his arm and went to extensive physical therapy for several months, do you then send your daughter to a special acting camp to compensate?

Or do you simply dole out money for your children as the need arises?

The Common Pot Trust

The Pot Trust takes this concept of spending for your minor children as needed and applies it to your trustees.  Instead of your will or trust passing your estate into separate, equally funded trusts for each child, the whole “pot”, is combined into one trust that benefits all the children together until they all reach adulthood.

If both parents are tragically gone during their children’s minority, then the trustee (the person overseeing and dispensing money from the “pot”) is directed to spend as if he or she is like a surrogate parent – he or she spends money on the kids in the same way that the parents would if they were alive.

Here are some concepts and directions that are generally written into such trusts to help the trustee adhere to this concepts:

  • Spending on each child is based on need rather than on equivalency.
  • Guardians should be reimbursed for any extra expenses incurred as a result of taking care of the children.
  • There is no “primary” beneficiary – this ensures that no child is required to receive any funds before or along with any other child.
  • Attention should be paid to make sure that younger children receive the same benefits that older children have already received.
  • Finally, and perhaps most importantly, unequal distributions can be made.

Splitting the Pot Trust into Separate Shares

Again, the pot trust is split into separate and equal shares for each child when all the children reach adulthood.  By that time, the “obligation” to provide for your kids throughout their childhoods has been satisfied.

But at what particular point does a person achieve “adulthood”?

It is best to come up with your own clear definition of when that time occurs, as this will depend on your personal values and your family dynamics.  Is it when the youngest child reaches a certain age like 18 or 21?  Is there more maturity at age 23 or 24? Is it when all the children have graduated high school or college?  You and your lawyer can come up with just about any standard that you want.

Examples and Possible Solutions

However, if you don’t think this through well enough, the real-life results may end up offending your notions of parental fairness.  Here are some examples and some possible solutions:

  • A child does not want to finish or even go to college.
    • If the college degree is of utmost importance, then you will have to provide further detail, such as the type of college (two-year or four-year; nationally or regionally accredited), whether vocational school is acceptable, etc.
  • One child is 10 or more years older than your youngest.
    • The oldest would need to wait an extra decade for an individual share, at which point the pot trust could be nearly empty.
    • Example:  Child A goes to and graduates from an inexpensive state university, and the trust pays the whole bill.  Child B gets into and graduates from an Ivy League school.  B stands to get hundreds of thousands of dollars more than A did, and further deplete the pot trust before they each get their individual share.
  • A child would like an “advancement” from the pot trust.
    • An older child might want the use of the pot trust funds before the youngest reaches adulthood for a wedding, a new business, or a down-payment for a new home.
    • The trust can be set up so that any amount “advanced” from the pot trust results in the reduction of that amount from that child’s eventual separate share — a win-win kind of result.
    • Example:  Child A is 5 years older than Child B.  The pot trust is to split into equivalent separate shares for A and B when B turns 24.
      • When B turns 24, the trust has $500,000 remaining.  Before B turns 24, A takes a $100,000 advancement from the trust for a down-payment on a house.
      • Since A already took $100,000, A’s trust gets $200,000.
      • B’s trust gets a full $300,000 share.

Conclusion

Equality is not necessarily equal to fairness.  Consider this when constructing your own estate plan!

 Common “Pot” Trusts: Why You Shouldn’t Treat Your Children Equally
 Common “Pot” Trusts: Why You Shouldn’t Treat Your Children Equally

Scott

Scott R. Zucker, Esq. is the owner of The Zucker Law Firm PLLC, located just outside the Capital Beltway in Annandale, within five miles of the City of Fairfax, the county seat of beautiful Fairfax County, Virginia. The firm focuses mainly on estate planning services for Virginia, Maryland and Pennsylvania clientele, and seeks to do so in an affordable and approachable way. People interested in learning more can contact Scott by phone or email.

More Posts - Twitter

Tags: , , , , , , , , ,

2 Responses to Common “Pot” Trusts: Why You Shouldn’t Treat Your Children Equally

  1. June 30, 2011 at 1:36 pm

    Great post and food for thought.
    Roger Wohlner recently posted..Investing is Not Sexy

    • Scott
      July 2, 2011 at 11:41 am

      Thank you so much, Roger!

Leave a Reply to Roger Wohlner Cancel reply

Your email address will not be published.

CommentLuv badge