Family Pot Trusts – Sprinkling Trusts

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Understanding Family Pot Trusts

Family pot trusts, also known as sprinkling or discretionary trusts, are a unique type of trust that grants the trustee considerable flexibility in managing and distributing funds to the beneficiaries. These trusts are commonly established by parents to ensure ongoing support for their children in the event of the parents’ incapacitation or death. Unlike traditional trusts with rigid instructions, pot trusts allow the trustee to make discretionary decisions on how much and when to distribute funds to the beneficiaries, typically the children.

How Pot Trusts Work

In a pot trust, the trustee has the authority to decide which beneficiaries receive funds and the amounts they receive based on their needs and circumstances. This flexibility is particularly beneficial when the future interests and needs of the children are uncertain. For example, one child might require funds for medical bills, while another might need assistance with tuition. The trustee can adjust the distributions to accommodate these varying needs and abilities.

Advantages and Potential Disadvantages

The main advantage of pot trusts is their flexibility, allowing the trustee to adapt to the beneficiaries’ changing needs. However, this same flexibility can also pose a risk. There is potential for the trustee to misuse their discretionary power, acting contrary to the intentions of the trust’s creators. To mitigate this risk, trust instructions, while not legally binding, can provide valuable guidance to the trustee. These instructions might outline acceptable expenses, such as a car purchase, a gap year, or seed money for a business.

Importance of Choosing the Right Trustee

Given the high level of discretion involved, selecting a trustworthy and capable trustee is crucial. The trustee must be able to step into the parents’ shoes and understand their philosophy and intentions. This understanding helps ensure that the trustee’s decisions align with what the parents would have wanted for their children.

Termination of the Pot Trust

A pot trust typically remains in effect until the youngest child reaches the age of 18 or another specified age set by the trust. Upon termination, the remaining funds are usually distributed equally among all the children. While pot trusts offer significant flexibility, separate share trusts might be a better option for some families, depending on their specific circumstances.

Conclusion

Family pot trusts provide a flexible and adaptive way to support children when parents are no longer able to do so. However, the success of a pot trust largely depends on the trustee’s ability to manage the trust in accordance with the parents’ wishes. Proper guidance through trust instructions and careful selection of a trustee are essential to ensuring the trust functions as intended. For more information on choosing the right trustee, see also: Who should be trustee?

 

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