Taxation & Estate Planning

What is a Pot Trust?

By Jeramie Fortenberry

How would you like to set up a pot trust for your kids?

Actually, it isn?t as bad as it sounds.  A pot trust has nothing to do with illegal herbal recreation.

Pot trusts are designed to equitably distribute assets to a group of children with a range of ages.  For example, assume that a husband and wife want to distribute their assets to their children at the death of the second spouse.  Assume that their youngest child is 11 and their oldest is just finishing college.  Would it be fair to split the assets between these two children?

The answer in most cases is ?no.?  The 25-year-old child has already been supported for the bulk of his youth.  He can spend his share of the trust on whatever he chooses.  The younger child, though, still has some years of dependency.  Her share will be spent on providing for her needs over the next decade or so.  The goal of dividing the estate between the children, which seemed fair enough at first, turns out to favor older children to the detriment of younger children.

Pot trusts are used to address this problem by delaying the division of assets.  Instead of dividing the assets equally upon the death of the second spouse, a pot trust could be used as a receptacle (?pot?) to hold the property until the youngest child graduates from college.  Until then, the money is held in the pot.  It can be spent on either child, but the primary purpose of the trust is to provide for the younger child until he reaches the age of self-sufficiency.

Once the younger child graduates from college (or reaches whatever trigger is described in the trust), the division of assets is finally made. At that point, the trust assets can be distributed to both of the children.  Each will have had their room, board, and college paid for, and each will receive an equal share of whatever is left after payment of those expenses.  This is a much fairer result in many situations.

Full post as published by Death and Taxes Blog on April 04, 2012 (boomark / email).