Common Trusts: Parenting beyond the Grave

Parents strive to make their children feel equally valued, as reflected in the fact that parents typically divide their accounts and property equally among their children when setting up an estate plan. But while parents strive to treat their children the same, they simultaneously acknowledge that children have different needs at different times. And these needs do not always correlate with perfectly equal dollar amounts.

Should something happen to you and your accounts and property pass to your minor children in equal shares, there may not be enough money for each child’s expenses. Almost certainly, one child will require more funds than another. Instead of simply dividing your accounts and property equally among your children, you can place accounts and property in what is known as a pot trust or common trust with instructions for your trustee on how to spend the money and property on behalf of all the beneficiaries.

Why Use a Common Trust? 

You probably do not keep a ledger of how much each child costs you. You spend as much money as each child requires. Inevitably, there are spending imbalances. Although not perfectly equal in terms of dollar amounts, such an approach can be considered fair because you allocate funds based on need instead of an arbitrary measure such as age.

Fairness involves accounting for the differences among your children. You want to be fair to them in life – and in death. When setting up an estate plan, you are acknowledging the unpleasant possibility – no matter how remote – that you may not be around to care for your minor children while they are growing up.

If you want your post-death spending arrangement to mirror the one you currently use to provide for your children, consider a common trust. To ensure that your trustee will use the same considerations, you should include instructions that outline criteria similar to what you would normally use for spending money to meet your children’s needs and expenses. Dividing accounts and property into equal shares may not be the best way to achieve this goal. In particular, older children may benefit more from an equal distribution because you have already invested more money in their education and other costs. In comparison, younger children would be forced to use their share of the inheritance to pay for such things.

How Does a Common Trust Work?

The basic mechanisms of a common trust are as follows:

  • You set up the trust and list your children as beneficiaries.
  • You name a trustee to manage the trust on your children’s behalf.
  • The trustee makes trust distributions to your children on an as-needed basis as you directed in the trust agreement.
  • The trust terminates when the youngest child reaches the age you specified in the trust documents (for example, age eighteen or twenty-one).
  • When the trust terminates, any remaining accounts and property are then divided into equal shares for your children. These shares could be immediately distributed outright, at certain ages, upon completing other milestones, or at the trustee’s discretion. Which option you choose will be based on how comfortable you are with your children having access to the money and property, the value of the remaining money and property, and the potential for your children to spend the money and property frivolously.

You can also leave instructions to the trustee that older children can receive an advancement from the common trust to pay for expenses such as buying a home or starting a business. Those funds would then be subtracted from the share they ultimately inherit when the common trust terminates. This choice allows older children to have access to their share if they need it, without making them wait for their younger siblings to come of age.

Note that you are not required to specify a particular age at which the trust terminates. You can choose an event, such as the youngest child’s graduation from an accredited college or university. Just keep in mind that such events might not come to pass or may take longer than anticipated to complete (e.g., the youngest child could fail to graduate, decide to take a five-year break between graduating from high school and starting college, or stay enrolled in college for seven years taking a variety of courses without completing a degree), so including age with the milestone can be a more-reliable marker, such as when the youngest child graduates from an accredited college or university or reaches the age of twenty-three.

Advantages and Drawbacks of a Common Trust

The key benefit of a common trust is flexibility. You are giving the trustee the same spending discretion that you currently exercise. They have the authority to manage money for the family in the same way you would. This is not only a heavy burden for the trustee but a big decision for you because the trustee will be forced to manage family dynamics, objectives, and interests. Choose wisely.

From your point of view, a common trust might be the fairest way to handle leaving accounts and property to your minor children, even though it is not 100 percent equal. Of course, your children may have a different outlook. Older children could resent waiting until the youngest child reaches adulthood to receive their share of the funds. And by then, depending on the size of your estate, the funds might have been depleted by the younger children.

A common trust might not be the best option if there is a large age gap between your oldest and youngest children. But if you have minor children who are close in age and want to give a trustee discretion to care for their needs in a parental manner, a common trust is a wise option. However, it is not the only option. For children with diverse ages or needs, you could choose to divide funds equally into an individual trust for each minor child or explore additional options.

To learn more about common trusts and how they can protect your children, as well as other important estate planning tools, please schedule an appointment with our law office.

At Cheever Law, APC, we don’t just draft documents; we ensure you make informed and empowered decisions about life and death for yourself and the people you love, which starts at a valuable and educational Family Wealth Planning Session. The Life & Legacy Planning Session will allow you to get more financially organized than you’ve ever been before and make all the best choices for the people you love. If you have already completed your estate plan, we will review that plan at your Life & Legacy Planning Session (aka Family Wealth Planning Session) to ensure that it will work the way you intend and address any holes or gaps that may be present if circumstances have changed since you executed your plan.   

To learn more about our one-of-a-kind systems and services, contact us or schedule a 15-minute introductory call today.