Why do I still talk to my clients about pot trusts?
Suppose a client dies while her three kids are still young. There are a few choices about how to hold assets for the kids.
The trust could say: create equal one-third shares, so each kid has their own share. That way, the kids are treated equally. If the oldest one gets into Harvard, their education costs come from their share without implicating the two other kids’ shares. It’s a widespread approach because it seems fair. Three kids, three shares.
But there’s a real risk of creating disparity. Let’s skip down the road a bit.
The oldest child has one son. When that child dies, the grandson will inherit a 33% share.
The middle child has two children. Those grandchildren will inherit shares worth about 16.5% of the estate.
The youngest child has five children. Each of them will inherit shares worth about 6.6% of the estate.
Does it still seem fair? Will the grandchildren with 6.6% shares receive the same benefits as the grandson with a 33% share?
As more families amass estates that should last beyond the kids’ lifetimes, it’s a meaningful discussion.
Would my client prefer a pot trust that allows all the kids and grandkids equal opportunity to benefit from the trust? Especially if the pot trust splits when the youngest child dies, meaning all grandkids end up with equal shares?
Clients generally aim to be fair to their kids and grandkids, and using a trust structure that focuses on those two generations is often a good idea.
It may only work sometimes, but clients should get to think about the possibility.