Pot trusts can be especially useful in situations where flexibility is key, such as addressing unexpected expenses or supporting a beneficiary who requires more financial assistance than others. However, the discretionary nature of a pot trust means it requires a highly trustworthy and capable trustee who can balance the interests of all beneficiaries fairly while adhering to the trust's guidelines. For example, if one beneficiary requires funds for education, medical expenses, or other specific needs, the trustee has the discretion to allocate money accordingly. This type of trust is often favored by parents or guardians who want to ensure their children’s individual needs are met, recognizing that those needs may vary significantly over time.
On the other hand, since the trustee has discretion over distributions, beneficiaries may feel allocations are unfair, especially if one receives significantly more than others. This perceived inequity can lead to resentment, disputes, and mistrust, particularly if the reasoning behind the trustee’s decisions is unclear. Additionally, the burden placed on the trustee can be immense. They are tasked with assessing and prioritizing each beneficiary's needs, often navigating complex family dynamics. This responsibility can be stressful and, if mismanaged, could expose the trustee to liability or legal action from dissatisfied beneficiaries.
Ambiguity in the trust’s guidelines can further complicate matters. Without clear terms for distributions, the trustee might make inconsistent decisions, leading to further disputes. Balancing the immediate needs of beneficiaries with the long-term preservation of the trust’s assets is a delicate and subjective task that can leave some beneficiaries feeling neglected. Moreover, one beneficiary’s significant needs—such as medical expenses or education—might deplete the trust’s resources, leaving little for others and potentially undermining the trust’s intent.
To better understand the use case for pot trusts we asked our four T&E experts the question, “Pot trusts, Yes or No?” and these were their responses:
Almost never advisable, particularly when a sibling is named trustee f/b/o non-special needs siblings. In my experience, the trustee of a pot trust will never make any of the benes happy until the trustee distributes all of the trust principal, thereby freeing self from that misery (and I've seen several trustees do that). Commercial trustees don't like fully discretionary pot trusts where they have the discretion because it's too much discretion.
Pot trusts? Almost always say no.
Paul is a seasoned trusts and estates expert with decades of experience as an author, speaker, and advisor. He has written nine books and over 500 articles on estate planning, tax strategies, and business valuation, and has taught at universities across the U.S. Known for his engaging and no-nonsense approach, Paul excels at making complex topics clear and actionable for professionals at all levels.
One thing you can count on is that siblings and their respective family lines are going to want financial independence after their parents have passed away. I don’t think you do family relationships any favors by forcing siblings to commingle their respective inheritances longer than necessary. Trustees are often authorized to invest assets from multiple trusts as a common fund anyway, so pot trusts aren’t really necessary for economies of scale. Some planners like to delay dividing a trust among siblings until the youngest has graduated college; I think there are situations where that can be appropriate but as a general rule my advice is to avoid keeping a pot trust for multiple members of the same generation after the prior generation has died.
Conrad is an experienced estate planning attorney who helps high net worth families with multigenerational wealth planning, building sophisticated tax strategies, and structuring business and charitable legacies. He also advises non-profit organizations with respect to their organizational and tax matters.
Fans of pot trusts usually have never actually administered a pot trust - which can be a thankless job for which conflict is inherent or inevitable. That being said, there can be use cases where pot trusts work better than others. For example, a pot trust holding a closely-held business interest (especially a voting interest), or a family heirloom asset (such as a vacation home), may be easier to administer than separate share trusts with smaller fractional interests in each of these assets. But, if co-investment is a goal, separate share trusts may be able to pool assets in an LLC or other investment vehicle as an alternative to a pot trust.
Griffin is a knowledgeable estate planning attorney and strategist. Known for bridging the gap between introductory and advanced estate planning topics, Griffin educates attorneys and wealth professionals through his YouTube channel and newsletter, State of Estates, with over 350 videos and 150 articles to date. He is also a sought-after speaker for estate planning councils, bar associations, and CLE providers.
Michael Bakhama:
Pot trusts are often disfavored for the sound reasons noted by my esteemed colleagues. In certain circumstances, though, they can be effective when used judiciously. Specifically, pot trusts can be helpful for clients who want to treat young children equally when there are significant age gaps among them. A simple example illustrates the point. Suppose you represent Clients, Mom (F, 52) and Dad (M, 53), who are worth $2MM and are raising two children: Son (M, 23) and Daughter (F, 16). So far, they have bought Son a car ($25,000), helped with his undergraduate tuition ($50,000), and assisted him with his down payment on his first house ($25,000). They plan to do the same for Daughter, who just got her driver’s license and is about to attend college. Tragically, however, Mom and Dad die in a car accident on Daughter’s 16th birthday.
If Mom’s and Dad’s assets were to divide equally right away, Son would be at a 5% advantage financially, as he’s already received substantial inter vivos gifts from Clients. Daughter, meanwhile, must pay for the same benefits from her half of the inheritance. While a planner can always implement a “true-up” clause to equalize the net amounts passing to each child, it is not always practicable to track and compute all lifetime gifts accurately. By introducing a “Division Date” (e.g., when the youngest child turns 25) and providing clear but precatory (non-binding) guidance to the trustees, Clients can use a pot trust to ensure that Daughter receives roughly the same opportunities and advantages that Son did—approximating their financial standing had their parents still been living—before the trust divides and the children part ways and become more independent.
Even in narrow circumstances such as these, where pot trusts may be appropriate, careful planners should give due consideration to the nature of the relationships among the siblings and trustees, the trust instrument’s guidance to the trustees, and the selection of an appropriate Division Date.
Michael is an experienced estate planning attorney who helps high net worth families with multigenerational wealth preservation and in achieving related charitable and tax objectives. In his fiduciary litigation practice, Michael has handled cases and appeals around the country, resulting in several notable precedential trusts and estates decisions in the State of Maryland. He has taught as an adjunct professor at the University of Maryland School of Law since 2015.
