If you have two or more children, a “pot” trust may be right for your estate plan. Trusts can be an effective way to provide for your children. Typically, parents will create separate trusts for each child, splitting their assets into equal shares to fund each trust.

However, it’s important to keep in mind that treating your children “fairly” in your estate plan doesn’t always mean you’re treating them “equally.” This is where a pot trust can help.

Consider your children’s needs

Most parents want to avoid playing favorites, so separate trusts appeal to their sense of fairness. But “fair” and “equal” aren’t necessarily the same thing. Think about how you use your funds now. If one of your children has a specific need — whether it’s college tuition, medical care or something else — it’s likely that you’ll pay for it without feeling any pressure to spend the same amount on your other children.

View your estate plan in the same light: Fairness means providing for your children’s needs, regardless of whether you distribute your assets equally.

For example, suppose you have two children, Chase and Reece, ages 23 and 18, respectively. Chase recently graduated from college, and Reece is about to start. You’ve already spent more than $200,000 on Chase’s tuition and other college expenses. If you were to die tomorrow, and your estate plan divides your wealth equally between Chase and Reece, Chase will ultimately come out ahead. That’s because he already received the benefit of $200,000 in college expenses. Reece, on the other hand, would need to tap her trust fund to pay for college.

Turn to a pot trust

A pot trust can be a great way to continue meeting your children’s individual needs and avoid giving one child a windfall. As the name suggests, you pool assets into a single trust and give the trustee full discretionary authority to distribute the funds among your children according to their needs.

Essentially, a pot trust allows the trustee to spend your money the way you would if you were alive. If one of your children has substantial education expenses or medical bills, the trustee has the authority to cover them, even at the expense of your other children’s inheritances.

For many families, a pot trust makes sense when children are relatively young and are likely to have differing needs that can change dramatically over time. If appropriate, your plan can call for the pot trust to be divided into separate trusts for each child at some point in the future.

Think twice before naming a trustee

For a pot trust to be effective, it’s critical to choose your trustee — as well as a backup trustee — carefully. As with any type of trust, your trustee should be trustworthy and impartial and have the skills necessary to manage the trust assets. But for a pot trust, it’s particularly important for the trustee to have the ability to communicate effectively with the trust’s beneficiaries.

Because distributions depend on each beneficiary’s unique needs, the trustee must understand those needs, as well as your objectives for the trust. He or she also must be able to explain the reasoning behind his or her decisions to all the beneficiaries.

Draft with care

Using a pot trust can provide you peace of mind that you’re treating your children fairly in your estate plan. Turn to your estate planning advisor to ensure that your pot trust is properly drafted.

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