How Does a Pot Trust Work?

A pot trust is a type of trust listing children as beneficiaries, with the trustee using his or her discretion as to how trust assets should be spent. If you have minor children, setting up a pot trust could help meet their financial needs if something should happen to you. This type of trust allows you to create a single pool of assets to benefit multiple children. Because of this, a pot trust can offer more flexibility in how trust assets are used when you plan to leave your entire estate to your children.

Consider working with a financial advisor to explore which type of trust best protects your children.

Pot Trust, Definition

A pot trust has many names, including discretionary trust, sprinkling trust or common pot trust.

This type of trust is popular with families to pass on assets. Minor children serve as beneficiaries while a trustee oversees the management of trust assets. The trustee has discretionary power to determine how trust funds are used to pay for the beneficiaries’ care and needs.

For example, say you create a family pot trust for your three children, and one of them experiences a medical emergency. The trustee can then authorize the use of trust funds or assets to cover those costs.

Flexibility is a key characteristic of family pot trusts. Assets are distributed based on the children’s needs instead of specific distribution rules.

A pot trust may be the best type of trust for you if you have two or more children, including one minor, and you plan to leave your entire estate to your children when you pass away. Having this type of trust in place can provide reassurance if something happens to you.

How a Pot Trust Works

Pot trusts apply when you plan to leave all of your assets to your children. Generally, a pot trust terminates when the youngest beneficiary reaches a certain age. For example, you may set the trust up to terminate when they turn 18, 21 or 25.

As long as the trust is in place, the trustee can use their discretion to decide how trust assets may be used to provide for the beneficiaries’ well-being. For example, if one of your children has special needs, the trustee could use trust funds to pay for any associated costs for care. If one of your children requires extensive orthodontic care, the trust may cover that, too.

The purpose is to meet the financial needs of individual children as they arise, so there’s no requirement for trust assets to be divided equally among them. Once the youngest child reaches the required age, the trust terminates, and any remaining assets are distributed among the beneficiaries.

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Pros and Cons of Pot Trusts

There are both advantages and disadvantages to pot trusts that can help you better determine whether a pot trust is right for your family.

Pros of Pot Trusts

Pot trusts can offer an advantage to parents who want to ensure that the needs of their children will be met should something happen to them.

If both parents pass away, a pot trust can provide money to cover basic living expenses, as well as other costs that might arise. You can decide when the trust should terminate based on the ages of your children. However, children can still receive distributions from the trust once it terminates if there are still trust assets remaining.

Cons of Pot Trusts

One potential issue with pot trusts is that they don’t ensure an equal distribution of assets among children. This is because the purpose of the trust is to manage financial needs as they arise. That means if one of your children needs surgery but the other remains healthy, the one who required surgery may receive a bigger share of trust assets to pay for it.

A family pot trust can also put an increased burden on the trustee. In effect, the trustee must assume a parental role in financial decision-making because the trust grantor did not leave behind any predetermined instructions. Children may also chafe at having to wait until the youngest child comes of age for the trust to terminate and the assets to be distributed.

Pot Trusts vs. Individual Trusts

If you’re concerned about potential favoritism or older children having to wait for their inheritance, you may consider establishing individual trusts instead. This way, you can designate specific assets to each trust with instructions on how the trustee should manage its assets.

The upside of this is that you have more control over what happens with trust assets, and you can choose how much of your estate each child should receive. However, the downside is that setting up and maintaining multiple trusts can be costly.

Talking to an estate planning attorney can help you decide whether a pot trust makes the most sense when passing on assets to your children.

How to Set Up a Pot Trust

Setting up a pot trust isn’t that different from setting up another type of trust.

You must create the trust on paper first, naming your beneficiaries. You must also name a trustee and specify their fees. You then fund the trust with assets. From there, the trustee has the power to manage those assets on behalf of your children if you yourself are unable.

The trust should specify at what age the trust should terminate and assets should be distributed. This may require extra consideration if there’s a wide gap between your oldest child and your youngest.

For example, if your oldest child is 21 and your youngest is 11, you may set the trust to terminate when the youngest child turns 18. This means that if you pass away, the oldest child will have to wait seven years to receive a distribution of trust assets. They may not be keen on the idea of waiting to receive an inheritance, so when planning your estate, you may want to include adult children in the discussion.

Likewise, it is often wise to work with a financial advisor when creating a pot trust rather than doing it yourself.

Choosing the Right Trustee for a Pot Trust

Selecting a trustee shapes how the pot trust will function in real life.

Because the trustee controls when and how assets are distributed, this person or institution effectively determines whether the trust accomplishes its intended purpose. A trustee must be able to interpret the trust document, manage investments prudently and make judgment calls about each child’s needs without favoritism or undue influence.

Many families initially consider naming a close relative or family friend as trustee. This can work when the individual is financially capable, organized and willing to take on long-term responsibility. However, personal relationships can complicate decision-making, especially when one child requires substantially more financial support than another. A trustee who is emotionally invested may struggle to remain neutral in high-stakes situations.

Professional or corporate trustees, such as trust companies or banks, offer a different set of advantages. They bring experience in fiduciary administration, recordkeeping and compliance and are less likely to be swayed by family dynamics. The tradeoff is cost, as professional trustees charge ongoing fees. Additionally, some families feel a corporate trustee may lack personal insight into a child’s day-to-day circumstances.

Some parents address these concerns by naming co-trustees. For example, one trustee may be a trusted family member familiar with the children, while the other is a professional who handles administration and investment management. This structure can balance personal knowledge with technical expertise, though it requires clear coordination and communication between trustees.

It’s also important to name successor trustees. If the original trustee becomes unable or unwilling to serve, the trust should continue without court involvement or disruption. Defining successor trustees in advance helps preserve continuity and reduces the risk that control of the trust shifts to someone the grantor would not have chosen.

Bottom Line

A pot trust is a type of trust that can simplify estate planning for families to ensure minor children are provided for. However, it may not be right for everyone, so be careful to consider both the pros and cons first before setting one up.

Tips for Estate Planning

While a trust can be a useful estate planning tool, it’s not the only one you may need. You may also need to set up a will, advance healthcare directive or power of attorney to protect your assets. Life insurance, disability insurance and longterm care insurance are also things to consider including in your estate plan to ensure that you’re able to pass on as much of your estate as possible to future generations.
Consider talking to a financial advisor about pot trusts and how you may be able to use one to manage your estate. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.