A “pot trust” is also often referred to as a “common trust.” This type of trust structure arose as an answer to the problem of inequitable uses of money left to minor kids.
Suppose, for example, that a married couple with a net worth of one million dollars both pass unexpectedly in an accident. Suppose also that the couple had an estate plan that appointed a trustee and instructed him or her to set up three trust shares for their surviving minor children, all between the ages of 12 and 15. Each of these children’s shares would be funded with more than $300,000 to help pay for their care. However, if one of them suffers from a learning disability or a physical disability that is expensive to manage, that child will exhaust their trust share much faster than their siblings to address a life expense that is outside of their control. When the children become eligible to withdraw their trust funds, the disabled child will be left with considerably less funds, or perhaps none, to work with. Pot trusts are designed to eliminate this type of inequitable outcome.
A pot trust allows a trustee to keep funds for minor kids in one “pot” until a specified time or age. Once the specified age is reached—for example, when the youngest reaches 18—the trustee would then divide the remaining funds into equal shares for surviving children. When one child has higher living expenses, the pot trust structure enables that child to direct more of their inheritance to traditional uses, like purchasing a first home or pursuing higher education. Thus, a pot trust permits a trustee to manage funds in a manner that most closely mirrors what parents might do if they were still living.
