Using Trusts in Estate Planning for Your Children

As parents, we spend countless hours planning for our children's present – their education, their health, their happiness. Our plans and aspirations for our children while they’re growing up are often fairly detailed. What kind of education should they have?  Sports and other activities? Should they have a job in their teen years?

We also have our eye on caring for them in the future. We work hard to save something that we can pass on to them as a legacy in the future. Our vision of the future is often far less detailed.  It might extend only to how to divide our estate among the children (usually equally) and maybe we’ll give thought to at what age they should be able to receive their inheritance.  Beyond that, most parents are not aware of the other planning options available to them.   

It’s a difficult topic, but one of the most loving and responsible acts you can take is to establish a robust estate plan that ensures your children are cared for, both personally and financially, no matter what tomorrow brings.  Here are a few planning options you might want to consider as part of the future plan for your children.

Managing Their Inheritance: "One-Pot" vs. "Two-Pot" Trusts

The next step beyond how your legacy is divided and age of distribution is to determine how their inheritance will be managed before its distributed. For parents with multiple children, two common patterns emerge in trust planning: the "One-Pot" (or Common Pot) Trust and the "Two-Pot" (or Separate Share) Trust.

The "One-Pot" Trust: A Flexible Approach

Imagine your estate as a single, shared fund. With a One-Pot Trust, all your assets designated for your children are held together in one trust until a specific event occurs – typically when your youngest child reaches a certain age (e.g., 21, 25 or older).

PROS

• Flexibility for Unequal Needs

  • This is its biggest advantage. Much like you currently parent, a Trustee can distribute funds based on each child's individual needs as they arise. This means one child might receive more for an expensive college education, medical bills, or a significant life event, while the other might need less at that particular time.

    
    

• Mimics Parental Support

  • It mirrors how most parents financially support their children, allocating resources as needed rather than on a strict 50/50 basis from day one.

  
  

• Fairness in the Long Run

  • While distributions might be unequal in the short term, the goal is often to provide overall equitable opportunities for all children.

CONS

• Potential for Conflict: 

  • If the Trustee isn't careful or transparent, children might feel one is being favored over the other, leading to resentment.

    
    

• Difficulty for Trustee

  • Managing a common pot requires a highly trustworthy and discerning Trustee who can make tough decisions.

    
    

• Delayed Access

  • Older children may have to wait longer to receive their full share if the trust doesn't split until the youngest reaches the designated age.

The "Two-Pot" Trust: Equal and Distinct Shares

In contrast, a Two-Pot Trust divides your estate into separate, equal shares for each child immediately upon your passing (or the passing of the surviving parent). Each child's share is then held in their own individual trust.

PROS

• Clear Equality

  • From the outset, each child knows exactly what their share is, which can prevent perceived favoritism.

    
    

• Independent Management

  • Each child's trust can be managed independently, with distributions tailored to their specific needs and timelines without impacting their siblings' funds.

    
    

• Simplicity for Trustee

  • The Trustee's role can be more straightforward as they are managing distinct accounts.

CONS

• Lack of Flexibility

  • If one child has significantly greater needs (e.g., extensive medical care, specialized education), their share might be depleted quickly, while the other child's share remains untouched. The Trustee cannot reallocate funds between the separate trusts.

    
    

• "Unfairness" by Circumstance

  • While mathematically equal, it might feel inequitable if one child faces unforeseen, substantial expenses that the other doesn't.

    
    

• Early Distribution for Older Children

  • An older child's trust might pay out entirely before a younger child's major expenses (like college) even begin, leaving the younger child's share to cover more, potentially.

Using the Trust for Asset Protection

Regardless of whether you choose a one-pot or two-pot approach, holding your children's inheritance in a trust (rather than distributing it outright at a certain age) offers significant benefits, even for adult children.

Asset Protection from:

1. Creditors

If your child faces bankruptcy, business failure, or significant debt, assets held in a properly structured trust are generally protected from their creditors.

2. Divorce

In the unfortunate event of a divorce, assets held in trust for your child are typically considered separate property and are protected from being divided in a divorce settlement.

3. Spendthrift Tendencies

If you have concerns about a child's financial prudence, a trust allows a Trustee to manage distributions, ensuring the inheritance is used responsibly over time, rather than being squandered.

4. Addictions

Substance abuse problems in young people are all too common.  We sincerely hope this problem never is part of your life but if it is, your trustee can protect your child from themselves and restrict their access to the trust funds so that they are unable to feed their habit.

5. Incapacity

Should your child become incapacitated due to illness or accident, the trust provides a mechanism for ongoing financial management without the need for court intervention like guardianship.

Making the Right Choice for Your Family

There’s no one-size-fits-all solution when it comes to estate planning for your children. Your family's unique dynamics, your children's personalities, and your financial goals will all influence the best approach.

We encourage you to schedule a consultation with the experienced estate planning attorneys at Fiffik Law Group. We will listen to your concerns, explain all your options in detail, and help you craft a comprehensive plan that provides peace of mind, knowing your children will be secure and cared for, no matter what the future holds.

Contact us today to protect your family's future.