September 18th, 2019
This year’s articles have focused on various types of trusts such as testamentary trusts which are created for your heirs upon your death, and revocable living trusts that can be used to manage your assets while you are living and avoid probate after your death. This month, we are focusing on common pot trusts which are useful for grandparents, parents or anybody who wants to create a trust for the benefit of multiple beneficiaries, especially those of varying ages and needs.
The most frequent scenario for a common pot trust is where both parents tragically die and they have children at varying ages, but usually at least one of those children is still a minor, most parents would want their younger children to have the same financial advantages as their older children. A common pot trust achieves that goal by directing the trustee to spend the trust assets as a surrogate parent would rather than dividing immediately dividing it among the children. For example, if a couple had three children, the oldest child was a married, college graduate, the middle child was still in college while the youngest was only in high school. If the parents had the foresight to have their estate held in a common pot trust, the trustee could manage the trust for the benefit of all three children in a similar manner to how the parents would have treated their children themselves. The trustee would use the trust to ensure younger children had the same financial support for their education and other needs until they reached a certain age, such as twenty-three years old.
An age is a good benchmark for dividing the shares rather than a life event that may not happen, or one that we do not want to accidentally encourage. Even a highly intelligent child may not graduate from college due to an accident or illness. Likewise, it’s not usually advisable to utilize marriage or the birth of a child as a triggering event because we do not want to motivate a beneficiary to take on a life event that is not right for them just to access the trust funds.
Once the desired age to end the common pot is reached, the trust is usually split evenly among the beneficiaries. Often the parent or grandparent directs that the individual share remains in each beneficiary’s trust, but they could even direct that the shares be distributed outright to the beneficiaries at that time.
A common concern is that while we want to assist parents and grandparents in providing fairly for their younger children, we do not wish to hold the money back from the older children, especially when there is greater disparity in ages. This concern is easily addressed by providing the trustee with the power to give advances to older children as long as the trustee believes there will still be sufficient assets to even things up when they eventually split up the common pot trust into the individual shares. For example, if the oldest child would like an advance to purchase a home prior to the youngest beneficiary turning the triggering age for the end of the common pot, the trustee can use her discretion to give the older beneficiary an advance on their share.
Next month we will look at how irrevocable trusts can be utilized to achieve asset protection from the high costs of long-term care.