Monday, October 03 2011
You might think a pot trust would be a trust designed to hold your maui wowie and/or Bob Marley memorabilia. But in fact, this type of trust is designed to promote fairness in families with a big age gap between children.
In many cases, a husband and wife will divide their property equally between their children at the death of the second spouse to die. That can be fair, but what if one child is 25 years old (and has completed college) while the other child is 14 (and has yet to begin college)? Given the high cost of higher education, "equality" could be unfair in this situation. For instance, if we assume husband and wife had a combined estate of $400,000, then each child would receive $200,000. The younger child's inheritance may be consumed (largely or even entirely) by tuition and room and board, while the older child can use the $200,000 as he or she sees fit.
Enter the pot trust. Instead of dividing property equally at the death of the second spouse to die, the property is held in trust until the younger child reaches a certain age (for instance, 25) or graduates from college. Up until that time, money can come out of the pot trust for either child, but the main purpose of the pot trust -- expressed specifically in the trust document -- is for the payment of the younger child's education expenses.
Once the termination date is reached (say, younger child reaches 25), the pot trust terminates and the remaining property is then divided equally among the children. Let's say that the $400,000 combined estate referenced above drops to $240,000 while the pot trust is ongoing, because the younger child's college education cost $160,000. Upon the termination date, each child receives $120,000. A much fairer result, I think.
Source: Joel A. Schoenmeyer http://www.deathandtaxesblog.com/2011/09/what_is_a_pot_trust.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DeathAndTaxesBlogCom+%28Death+and+Taxes+Blog%29