What The Heck is a ‘Pot Trust’?

Nope, your first guess is wrong. We'll leave it at that. Nor does it have anything to do with your pot-bellied pig, however cute he is (although you could set up a pet trust, but that's another subject). In the estate planning world, a pot trust is a common tool used as a first "sub trust" in a revocable living trust plan, or even in a will that establishes trusts, usually for the benefit of the trust makers' children.

For example, an estate plan for a couple with minor children will often plan for the remote chance that both parents may die before their children reach the age of majority, or even a specific age the couple thinks is still too young for their children to inherit a bunch of money. In that instance, an estate planning attorney will create a "pot trust" to be used for the collective benefit of the children. A trustee is named to make decisions about how to use the assets of a pot trust. Think of that trustee as stepping in as a surrogate parent, making decisions about how the assets of the trust should be used for the children. In that way, a pot trust can offer more flexibility as to how trust assets are used if you plan to leave your entire estate to your children, says Yahoo Finance’s recent article entitled “How Does a Pot Trust Work?”

Flexibility is a key element of a family pot trust. Assets are distributed based on the children’s needs, rather than setting specific distribution rules as to who gets what. You might consider this type of trust over other types of trusts if:

  • You have two or more children;
  • At least one of those children is a minor; and
  • You plan to leave most of your estate to your children when you pass away.

As long as the trust is in place, the trustee can use his or her discretion to determine the way in which trust assets may be used to provide for the beneficiaries’ well-being. The aim is to satisfy the financial needs of individual children as they arise. However, pot trusts don’t ensure an equal distribution of assets.  In effect, the trustee has to take on a parental role for financial decision-making. That’s instead of adhering to specific directions from the trust grantor.

Generally, a pot trust ends when the youngest included as a beneficiary reaches a certain age as defined by the estate plan. This could be the age of majority, or 21 years old, or even 25 years old. The trust makers decide what age is appropriate for the pot trust to end, and then split into individual trusts for the children. This may sound complicated but it is a very common way to provide for your children in your absence when they are younger (however you define it) and then for the pot trust to naturally split off into individual trusts as your kids get older and meet certain milestones in their lives.

Setting up a pot trust isn’t that different from setting up any other type of trust. Ask an experienced estate planning attorney to help you. If you are in the Madison, WI area, give us a call to talk about planning for your family's legacy

Reference: Yahoo Finance (Aug. 30, 2021) “How Does a Pot Trust Work?”

Suggested Key Terms: Estate Planning Lawyer, Pot Trust, Probate Attorney, Trustee

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