One of the reasons to engage in comprehensive estate planning is to address the uncertainties of life. If an accident or illness caused an unexpected early death, a well-drafted trust can provide for children during their younger years. While parents often attempt to treat their children in the same manner, the reality is that different children have different needs at different times. While your children are younger, you probably do not track what you spend for each child and attempt to spend the exact amount for each one. While trying to treat each child in the same manner, the different needs each may have does not always correlate with perfectly equal dollar amounts.
Should you pass away while your children are still minors, your trust can attempt to treat your children in the same way that you would have if you were still alive, meeting each one’s individuals needs as they arise, while still treating them all as favorably and equally as possible. Instead of simply dividing your accounts and property equally among your children, you can place accounts and property in what is known as a pot trust or common trust, with instructions for your trustee on how to spend the money and property on behalf of all the beneficiaries.
Why Use a Common Trust?
As previously noted, you probably do not keep a ledger of how much each child costs you. You spend as much money as each child requires. Inevitably, there are spending imbalances. Although not perfectly equal in terms of dollar amounts, such an approach can be considered fair because you are allocating funds based on need instead of an arbitrary measure such as age.
Fairness involves accounting for the differences among your children. You want to be fair to them in life—and in death. When setting up an estate plan, you are acknowledging the unpleasant possibility—no matter how remote—that you may not be around to care for your minor children while they are growing up.
Your trust for your children should include instructions that outline criteria similar to what you would normally use for spending money to meet your children’s needs and expenses. Dividing accounts and property into equal shares may not be the best way to achieve this goal. Also, older children may benefit more from an equal distribution because you have already invested more money in their education and other needs while younger children would be forced to use their share of the inheritance to pay for such things.
How Does a Common Trust Work?
The basic mechanisms of a common trust are as follows:
- You set up the trust and list your children as beneficiaries after your death.
- You name a trustee to manage the trust assets on your children’s behalf.
- The trust assets are held in a common trust while there are still minor children.
- The trustee makes trust distributions to your children as needed as you directed in the trust agreement.
- The common trust terminates when the youngest child reaches the age you specified in the trust agreement (for example, age eighteen or twenty-one).
- When the common trust terminates, any remaining accounts and property are then divided into equal shares for your children. These shares could be immediately distributed outright, at certain ages, upon completing certain milestones, or at the trustee’s discretion. The option you choose will be based on how much protection you wish to provide your children from risks such as possible divorce, financial difficulties, unexpected lawsuits, or their own ability to manage the assets that you leave for them.
You can also leave instructions to the trustee that older children can receive an advancement from the common trust to pay for expenses such as education needs, buying a home, or starting a business. Those funds would then be subtracted from the share they ultimately inherit when the common trust terminates. This choice allows older children to have access to their share if they need it, without making them wait for their younger siblings to come of age.
Note that you are not required to specify a particular age at which the trust terminates. You can choose an event, such as the youngest child’s graduation from an accredited college or university. Just keep in mind that such events might not come to pass or may take longer than anticipated to complete (for example, the youngest child could fail to graduate, decide to take a break between graduating from high school and starting college, or stay enrolled in college for more years than expected while taking a variety of courses without completing a degree), so including an age with the milestone can be a more-reliable marker, such as when the youngest child graduates from an accredited college or university or reaches the age of twenty-five, whichever comes earlier.
Advantages and Drawbacks of a Common Trust
The key benefit of a common trust is flexibility. You are giving the trustee the same spending discretion that you currently exercise. They have the authority to manage money for the family in the same way you would. The flexibility you provide will assist the trustee in managing family dynamics, objectives, and interests. It is important that you choose a trustee that you trust will manage assets and treat the family as closely as possible to how you would have.
If there is a large age gap between your oldest and youngest children, a common trust might not be the best option, as the older child may have to wait longer to receive their share. This disadvantage can be minimized if the trustee is authorized to make advancements for the older child which would be later deducted from the equal shares created at the time the common trust is terminated. If you have minor children who are close in age, and you want to give a trustee discretion to care for their needs in a parental manner, a common trust is a wise option. However, it is not the only option. For children with diverse ages or needs, you could choose to divide funds equally into an individual trust for each minor child or explore additional options.
To learn more about common trusts and how they can protect your children, as well as other important estate planning tools, please schedule an appointment today. Call our office or schedule online!