Parents want to ensure that their children feel that they are all treated fairly and feel equally valued. However, the reality is that all children do not need the same amount of financial help, especially in different phases of their lives. Parents may want to divide their property and accounts equally among their children in their estate plans, but some children have greater financial needs than others.
A pot trust or common trust is a legal instrument that allows you to dictate instructions to the trustee on how to spend the money and property in your common trust to benefit all of your minor children, giving you the freedom to distribute your assets in response to each child’s needs.
When your children are growing up, you probably do not keep track of each dollar spent on each child. Instead, you pay for necessary expenses as they came, providing each child with as much money as needed, not based on a predetermined percentage of your money.
You distributed your money in a way that was fair to each of your children and based on need instead of an arbitrary value such as age. Inevitably, there will be spending imbalances while they are children, and these will probably continue.
While not equal, your distributions are fair. They account for the differences in your children and their needs. You may want to continue this way of distributing your money, even when you are no longer here. There is also the remote possibility that no one likes to consider: your children may lose their parents while they are still minors, and you want to financially provide for your children, even if you have died prematurely.
What is a Common Trust?
A common trust allows you to continue distributing your assets according to need. You can leave instructions for your trustee to ensure they use the same considerations and criteria when distributing your trust assets as you do when allocating funds to meet your children’s needs and expenses.
Factors such as their ability to get a job, marriage, a baby, extensive orthodontia, and educational expenses will probably affect how much financial support each of your children will need.
Steps to Setting up a Common Trust
The basic steps for establishing a common trust are:
- Set up the trust and list your children as the beneficiaries.
- Name a trustee to manage the trust property and accounts.
- Enable your trustee to make distributions to your children as per your instructions in the trust agreement.
- Terminate the trust when your children reach a specified age.
Any remaining accounts and property are divided into equal shares for your children. You can determine how your children will receive these shares. You may choose to give distributions when they reach a certain age or milestone or leave it up to the trustee’s discretion. Much of this depends on how concerned you are that your children will misuse their share of the trust.
Since you determine the terms and instructions in the trust agreement, you can stipulate that older children receive an advance on their final distribution early to establish a business, buy a home, or pay for a wedding.
You can choose an event, such as graduation from college, to terminate the trust. But events are much more fluid in timing than an age. You can even combine an event and an age. For example, you could terminate the trust when your youngest child either turns 25 or graduates from an accredited college.
The Benefits and Drawbacks of A Common Trust
Benefits of a common trust:
- Flexibility in spending
- Spending based on need rather than equal division
Drawbacks of a common trust:
- The trustee has a lot of authority and responsibility
- The trustee would have an inside look at your family dynamics, interests, and objectives
- Older children may think it is unfair that they must wait until minor children are adults to receive their shares of the trust
- Younger children with higher needs may deplete the trust funds
A common trust may be the best answer for a family with minor children who are all fairly close in age. It allows a trustee to distribute funds in much the same way as parents would. Other options may work better for children with diverse needs and families with large age gaps between the children.
Contact us to discuss your needs. We can help you determine whether a common trust is the best option for your family.