There are two popular methods to fund a Trust for your children at the time of your death. The first method is relatively simple. The assets are divided into equal shares and a separate Trust is established for each child at the time of your death. An example would be: I have a client who has three children, ages 16, 18, and 21, and at death, the client has $600,000.00 in assets. Under this method, each child will have a separate Trust of $200,000 established for his/her care, support, maintenance, and education. Some clients will think this is unfair. The eldest is about to graduate from college, and the younger two have all of their college expenses to be paid by their separate Trusts. In this example, the client has selected age 30 for distribution. At the time each child attains age 30, the remaining funds from each child’s Trust is distributed to the child.
The second method to fund a Trust for your children at the time of your death is the “one pot” method. This method is best explained by an example. We have the same client as above. Rather than dividing their assets immediately, all the assets are held in one Trust – one pot. All the expenses for care, support, maintenance, and education for all three children are paid from this one Trust. Individual expenses for each child are not kept track of. The client selected age 23 for the one pot Trust to end. At the time the youngest attains age 23, the assets in the Trust are divided into three equal Trusts, one for each child. In this example, the assets at the time the youngest attains age 23, are $300,000.00 due to the education expenses of the two younger children. Each child has a separate Trust of $100,000.00. The client has also selected age 30 for the individual Trusts to terminate. The individual Trusts for the children will be held for their benefit until they attain age 30. If a child is over the selected age of 30 at the time the one pot trust is divided, that child will immediately receive the Trust proceeds.
The one pot Trust offers the advantage that the funds will be spent more like they would be spent if you were still alive. When you spend money on your children you do not keep track of what you spend for each child and deduct that amount from the share the child will receive at your death. Some clients will insert special provisions regarding the amount or type of post high school expenses to be paid by the one pot Trust, or as an alternative, have excessive post high school expenses count toward their shares at the time the pot is divided. Another factor to be considered is the younger children may be entitled to Social Security benefits for a longer time period. Any of those Social Security benefits not spent on their care must be turned over to the child at age 18.
The lesson here is that it is impossible to treat each child equally. You may try to treat your children equally during your lifetime, but experience has shown that to be impossible. Trying to foresee events that may occur after your death and to be fair in all possible events is impossible. We at Wieber Green will help you devise a plan that fits your family.