A pot trust is a great estate planning tool that allows parents to ensure that their children are provided for financially after their death, while still maintaining control over the assets.
Trusts can be a valuable and powerful estate planning tool – if applied appropriately. Not all estates need a trust, and not all trusts are right for the job you might need them to do. For example: most trusts are designed by default to split any monthly income and the trust’s principal investment among all beneficiaries equally, or at least allow for a predetermined, albeit set allocation scheme. But what if you need to change who gets what, or adjust the monthly bequeathment?
What if one of your children carries a disproportionate financial burden due to their business responsibilities, or is simply in debt? What if one of your beneficiaries needs assistance in managing their wealth, because of a history of reckless spending? We cannot predict the future, and while equal distributions are sound in theory, you may need something more flexible in practice.
In such cases, setting up multiple different trusts to manage the individual needs of each beneficiary can become excessively costly or difficult. It’s much easier to manage your heirs needs through a single pot – which is how the pot trust, otherwise known as the common pot trust, was created.
Understanding how pot trusts operate can give you a better idea of just how flexible they can be – and when you might want to consider them for your estate plan.
What is a Pot Trust?
All trusts exist as a legal entity defined and created through a legal document called the trust document. There are three parties involved in the creation and management of a trust: the grantor (or trustor), the trustee(s), and the beneficiaries. Trusts are incredibly flexible – to the degree that a single person can simultaneously be a trust’s grantor, trustee, and beneficiary, for certain purposes (such as asset protection).
Each party plays an important role. The grantor defines the trust and calls it into life. They also fund the trust with their assets and belongings. The trustee manages the trust. Most trusts are living trusts, meaning they are called into existence while the grantor is still alive. In such cases, the grantor may also elect to be the trust’s trustee, especially if it is a revocable trust. They would name a successor trustee to continue to manage the trust after they die. Alternatively, the grantor might immediately entrust the management of the arrangement to a chosen trustee.
Individual trust definitions help describe certain trust archetypes, but it’s important to note that these serve as guidelines for how to structure a trust – the real benefit of utilizing trusts in your estate plan is that they can be customized to serve your individual needs. But for that, the services of an estate planning specialist are needed.
Pot trusts, in particular, are designed to allow a group of different beneficiaries to benefit from a single trust to varying degrees, with varying bequeathments. Furthermore, the trustee of a pot trust may be given discretion to divvy up the contents of the trust as they see fit, based on the individual needs of each beneficiary. Pot trusts exist to help account for the unaccountable, to provide a greater degree of flexibility for an uncertain future.
The Benefits and Advantages of a Pot Trust
The main draw of a pot trust is that it gives the trustee a greater degree of freedom in deciding who gets what.
Grantors who set up a pot trust wish for their trustees to divide the contents of the trust among the chosen beneficiaries as they see fit. Furthermore, a pot trust need not be dissolved immediately upon the grantor’s death. Pot trusts can exist for years or even decades, becoming a discretionary spending pool for trustees who have been assigned to watch over a minor child or special needs beneficiary’s financial requirements.
This allows pot trusts to continue to provide financial aid to your beneficiaries throughout multiple avenues of life, such as getting them out of debt, paying for tuition fees, or providing a much-needed windfall for medical expenses.
Another way to look at a pot trust is as a reserve fund that aims to provide for your beneficiaries even after you are gone, with someone at the helm who may be held accountable to their fiduciary duty.
Pot trusts are often opted for in cases where a grantor is likely to leave behind a minor child, or a special needs beneficiary. These are cases where the financial independence of the beneficiary is either years away or unlikely, and special guidance is required.
Using a Pot Trust in Your Estate Plan
Pot trusts must be worded carefully to give the trustee the freedom they need, while still making sure that the language accurately reflects the purpose of a trust, and defines your personal priorities as a grantor, providing a guideline for how the trustee might amend the trust’s distributions to account for the beneficiaries different life events.
This is easier said than done. The services of an estate planning professional can help you not only draft and implement a pot trust in your estate plan, but ensure that a pot trust is the right tool for the job.
Once a pot trust has been drafted, it is important to fund it. This is a crucial step in legitimizing and establishing the trust – it is not enough to name the items you wish to add to the trust in the document. If you wish to transfer an investment property into the trust to help accumulate a monthly income, for example, then you will need to amend the ownership documents to reflect that the property is passing into a trust, and file the necessary state paperwork, such as Change in Ownership Reports.
Limitations of a Pot Trust
There are disadvantages to a pot trust. For one, you are leaving the decision-making process in the hands of someone else. Picking a trustee you have absolute faith in is important – but if you cannot think of anyone or find anyone suited to the job, then a pot trust may be a gamble. They may not make decisions you would have agreed with, while still staying within the bounds of their fiduciary duty. Finding someone who you trust to understand your family and your way of thinking can make or break a pot trust.
Beneficiary disputes are also an issue. Pot trusts ultimately dispense money based on who needs it the most, which might be a point of contention among your beneficiaries as they get older. What if a pot trust risks to alienate two siblings who feel they were treated unfairly and received different benefits growing up?
Ultimately, the decision to use a pot trust rests on the specific circumstances of your estate and family, and why you might feel the need to maintain that level of flexibility, while sacrificing the certainty that other trusts might offer.