“Common Pot” Trusts and Family Values
By Oleg Cross, Esq.
Most people are motivated to create an estate plan to take care of their children. Indeed, the overarching purpose of estate planning is to pass wealth from one generation to the next with minimal expenses and taxes, and to give the settlor the maximum control over their own lives, their family assets, and the distribution pattern to their heirs.
One question that arises is what happens if a couple has more than one child with a significant difference in age. Naturally – barring any family conflicts or dynamics that would raise the possibility of disinheritance or unequal treatment – most people would want to pass along an equal share of the estate to each of their children. But the consequences of an “equal shares” approach is less obvious (and less practical) than it would appear at first glance. What if there are three children ages 5, 8 and 14? If the parents tragically pass away at the time when the oldest offspring graduates from college, the younger child will still likely need his parents’ estate to provide for him or her. Thus, if the estate was worth $450,000 at that time, the college graduate would stand to receive his or her equal share of $150,000 (minus administration costs), but already after his or her education was paid for by the settlors.
Meanwhile, assuming equal share distributions, the youngest would also receive $150,000 (minus cost of administration), but would still face the expenses of high school and college (which would likely burn through the entire $150,000 or a substantial part of it). In other words, under this scenario “equal shares” does not mean equal treatment of the children. Indeed, the oldest child would arguably come out ahead by $150,000 (with college already funded).
One way to address these issue is by way of a commonly used estate planning technique called the “common pot” sub-trust. This sub-trust part of the revocable living trust can be used to set up a “common pot” of family assets to be used for the benefit and expenses of all children. When a child turns 18, his or her college tuition expenses can be paid form the common pot, along with any other necessary expenses. This way, all children, including the youngest, get their high school and college tuition expenses paid through for with family assets, and once all of the children’s expenses are paid and the youngest either reaches a certain age (e.g. 21 years old) or a condition certain occurs (e.g. graduation from college), whichever is first, the sub-trust can be divided into equal shares – with each child receiving exactly the same amount of money after all expenses are paid. More importantly, the “common pot” gives the trustee greater flexibility to provide for the unique needs of each child. One aspect of this planning that is worth some thought is when should the “common pot” be divided: at an age certain (i.e. 21 years old) or upon a condition certain (e.g. graduation from college)? But what if the child foregoes college entirely and enlists in the Navy at age 18? There is, to be sure, more than one correct answer, but asking yourself the question – what is my measure of a child’s maturity and independence – may well start an informed thought process about what you want for your children and how you envision their successful future. *
*DISCLAIMER: The information contained in this post and on this website may contain LEGAL ADVERTISEMENT. It does not constitute and should not be construed as a legal advice. Similar results are not guaranteed. Past results are no guarantee of future results. The information in this article is provided for general informational purposes only. The law changes frequently and varies from jurisdiction to jurisdiction. Being general in nature, this information may not apply to any specific factual and/or legal set of circumstances. No attorney-client relationship is formed, nor should any such relationship be implied. Nothing on this blog is intended to substitute for the advice of an attorney, especially an attorney licensed in your jurisdiction. If you require legal advice, please consult with a competent attorney licensed to practice in your jurisdiction