Family pot trusts (also called sprinkling or discretionary trusts) are a type of trust where the trustee has flexibility in deciding who of the beneficiaries should receive how much of the funds and when. Pot trusts are often established by parents to ensure ongoing support of their children in case something were to happen to the parents. Instead of following strict and unbendable instructions from the creator (settlor) of the trust, usually the parents, the trustee has almost unlimited flexibility to decide what to give to the beneficiaries (usually the children), for example, for medical bills or tuition.
Often it is not clear at the outset what the future interests and needs of the children are. The children may receive different amounts according to their needs and abilities. A possible disadvantage is that this flexibility could be abused by the trustee and be used contrary to the wishes of the pot trust creators. The trustee must be able to step into the parent’s shoes and understand their philosophy. Therefore, so called trust instructions, while not legally binding, are of great help to the trustee. For example, what types of expenses are supported? A car purchase, a gap year, seed money for a business? Because of the level of discretion required, the choice of the trustee is very important. See also: Who should be trustee?
Typically the trust does not end until the youngest child reaches the age of 18 or another age set by the trust. Upon termination of the trust the funds will typically be disbursed pro rata to all children. Pot trusts are a flexible tool, but separate share trusts may still be a better choice based on a specific client’s facts and circumstances.
