For parents of minor children, estate planning is about more than simply deciding who inherits your assets. It is also about ensuring that those assets are managed and distributed in a way that supports your children throughout their lives. One estate planning strategy that can provide flexibility and fairness is the utilization of a “pot trust” structure.

A pot trust allows a trustee to manage and distribute funds for multiple beneficiaries, typically your minor children, from a shared pool of assets. Rather than dividing your estate into separate shares immediately upon your death, the trustee can use the funds to meet each child’s individual needs on an as-needed basis. This approach can be particularly beneficial when your children are at different ages and phases of life.

What Is a Pot Trust?

A pot trust (sometimes called a “family pot trust”) is a trust structure in which assets are held together for the benefit of multiple beneficiaries, often until the youngest child reaches a specified age. This allows you to select a trustee to manage the pooled trust assets for the benefit of the entire family unit, in the same manner you would if you were still alive.

During that time, the trustee has the authority to distribute funds to any of your children for expenses such as:

• Health care (Medical bills, emergency visits, etc.);
• Education (Private school, trade school, college tuition, etc.);
• General maintenance and living expenses;
• Extracurricular activities;
• Other needs that promote the beneficiaries’ overall comfort and well-being.

This allows the trustee to respond to the unique needs of each child rather than being restricted by rigid, “equal” shares. If your goal is to equalize what your children receive, the pot trust is better suited to match your intent compared to making a division of shares for each child immediately upon your death. This is highlighted in the example below.

A Practical Example

Consider a parent with three children: one who is 23 years old, one who is 17, and one who is 13. The parent’s estate includes $900,000.

Without a Pot Trust

If the estate were divided immediately upon your death into equal shares, each child would receive $300,000 placed in a separate trust account. While this may appear fair and “equal” at first glance, this method overlooks the needs of each child based on where they are at in life.

Let’s imagine that you’ve already helped to put your eldest child through college, and paid $150,000 towards college tuition. The 17-year-old might require support for private school, college-prep courses or SAT help, or other extracurricular activities. The 13-year-old may not need significant financial support for many years, as they are still in public schools as they enter their teenage years.

If you were to unexpectedly pass away and your estate plan utilizes a trust-funding mechanism that immediately creates three separate trust shares for each child, the trustee is limited to using only that child’s $300,000 share for their benefit, even if one child’s needs are greater at a particular time.

In addition, you can see how the eldest children usually come out in a more advantageous position with this arrangement. The 21-year-old has already graduated from college and entered the workforce. That child will receive the full $300,000 share that they could use for a down payment on a home, to pay off any outstanding student loans, to buy a vehicle, or to invest and get a head start on retirement. Compare that outcome to your 17 and 13-year-old. Your younger children will be designated $300,000 that will continue to be held in trust for their benefit.

However, if both children go to college or trade school, their inheritance will be eaten up to pay for these large expenses. Especially factoring in that college tuition seems to only be going up, these payments will cost more than they did when you were around to put your eldest child through school. If education costs for each child were approximately $150,000, then by the time your 17 and 13-year-old are in the same position as your eldest child is now, they would only be receiving half of the amount your eldest child received at that same station in life.

This calculation doesn’t even factor in the other daily expenses for your younger children that are inevitable to arise such as medical bills, cell phones and cell phone bills, driver’s education for your youngest, transportation, private training for the child’s interests (musical instruments, singing classes, sports training). After all of these expenses are met using their respective trust shares, each child would be lucky to have $100,000 remaining for them to use as they see fit once they reach the same age of 23.

With a Pot Trust

With a pot trust, however, the full $900,000 remains available to support all three children after your death. The trustee can use their discretion to take care of each child based on where they are in life. They could utilize a portion of the funds to aid the eldest child with rental payments for an apartment of their own. They could use the funds to pay for the 17-year old’s college tuition payments, as well as your 13-year-old if they decided to go to college when they were of age. Not to mention, the trustee could (and should) setup the entire pot trust in an interest-bearing account, to ensure that the funds continue to grow just as the children do. This will prolong the life of the pot trust to maximize how much assistance is available to all three children.

Once the youngest child reaches a specified age, which our trusts typically set at age 25 to ensure all of the children are financially mature enough to handle their full inheritance, the remaining value of the pot trust will then be split into thirds, and distributed to each child outright. In this example, let's say that once your youngest reaches the age of 25, and after any and all distributions have been made for each child based on their needs, the remaining trust balance is $420,000. Once your youngest child attains the required distribution age of 25, a final distribution would be made to each child, outright and free of trust, in the amount of $140,000 ($420,000 / 3). This still leaves significant assets to each child once they have reached adulthood and financial maturity, while equitably providing for each child throughoutt their younger years in the same manner you would have if you were alive.

This flexibility allows the trustee to distribute assets equitably, rather than “equally”, based on each child’s needs and circumstances. While your heart is in the right place as your intent was to equalize things for your children, making an equal division upon your death can actually backfire and have unintended consequences as highlighted in the above example. A pot trust allows the Trustee to manage the funds as a whole, for the benefit of the entire family unit, in the same way you would if you were still around to do so.

Structuring Distributions at Certain Ages

Parents are often hesitant to leave young adults with full control of a large inheritance too early. A pot trust can address this concern by allowing the trust to transition into separate shares and make distributions at specific ages.

For example, once the youngest child reaches a designated age, the trust might divide into equal shares with distributions structured as follows:

• One-third at age 25
• One-third at age 28
• The remaining balance at age 30

This type of structure allows beneficiaries time to mature financially before receiving the full amount of their inheritance. Some clients also build flexibility into their trust by granting the Trustee the power to make distributions to a child for certain life milestones, such as to purchase their first home, to fund their wedding, etc.

Financial Aid Considerations

Another often-overlooked benefit of delaying outright distributions until the post-college years (typically age 22–25) involves college financial aid eligibility.

When students apply for financial aid through the Free Application for Federal Student Aid (FAFSA), assets held in the student’s individual name may be counted when determining eligibility for aid. If a child receives an outright distribution from a trust while they are still in college, those funds would likely be considered part of the student’s personal assets, and as a result would have to be disclosed on the FAFSA application. This is another reason we always recommend age 25 for a final distribution.

By contrast, assets that remain in trust and are not in your child’s individual name are typically not considered their own personal assets, both for FAFSA purposes and for creditor protection purposes (discussed below). While your child may be the beneficiary of the trust, any assets held in trust are controlled by the Trustee, who holds legal title to those assets. When structured correctly, the Trustee cannot be compelled to make distributions, and will retain full and absolute discretion to make distributions to each child as they see fit, and in accordance wit the terms of the trust.

This structure allows for the Trustee to utilize trust assets to pay for college or higher education, without the beneficiary being forced to disclose those assets on any financial aid application. For families with children who may pursue higher education, structuring trust distributions to occur after the typical college years can help avoid the inclusion of those assets on any financial aid applications.

A Flexible Planning Tool for Families

Every family has unique circumstances and estate planning goals, which is why your plan should be custom-tailored to your needs, situation, family dynamics, and expectations about the future. A pot trust can be an effective tool for parents who want to ensure their children are supported fairly while also preserving flexibility for the trustee to respond to changing needs.

By combining thoughtful distribution schedules, financial aid considerations, and asset protection features, a well-drafted trust can help provide long-term financial stability for your children at every stage of life. If you have minor children and are considering how to structure your estate plan, the trusted attorneys at Lane, Lane & Kelly can help determine which type of trust and trust structure best aligns with your family’s unique goals. Contact us today to schedule your free, no-obligation estate planning consultation.

 This blog is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By reading this blog you understand that there is no attorney client relationship between you and Lane, Lane & Kelly, LLP.