When you leave an inheritance for minor children, an Irrevocable Trust may be your best friend. These trusts offer benefits such as estate tax reduction and asset protection. Within the world of Irrevocable trusts there are many different types. Common pot trusts and individual trusts, two kinds of irrevocable trusts, are often used to leave an inheritance to children or grandchildren.
A Common Pot Trust is a single trust used for all children. This trust can be monitored by one trustee. If you have very young children who will need financial assistance for many years until adulthood, a pot trust can make trust administration easier. The cost of maintenance may also be less since it is only one trust to administer.
The funds within the trust are not split between the children but are available to be shared. The trustee may spend more funds on one child than another if needed. This can be beneficial if any of the children has special medical needs or differing educational needs. If, however, you feel this is not equitable, a Pot Trust may not be for you.
This type of trust ends as soon as the youngest child reaches a certain age. At that time, what remains is split evenly between the beneficiaries even though one may have received more assets at that time. However, this is probably what you would have done had you been alive to manage your family assets. Even though all children must wait for the youngest to reach adulthood before the trust ends, funds needed for higher education or other purposes may still be distrubuted by the Trustee for any of the children.
If you feel a pot trust may not be flexible enough for your needs, you may wish to consider leaving an individual trust for each child. With an individual trust you have the option for the trust to end when the child reaches a certain age. You may prefer this option if you feel each of your loved ones will have enough assets from their seperate share and not be dependant upon the youngest reaching a certain age before the ultimate distribution to the older children may be made.
Each trust can also be used as a lifetime trust for the designated beneficiary. This can provide financial security throughout life. It can also be a way to pass on money to future generations and protect against ex-spouses and creditors of a child. One downside to using several individual trusts is that they are often more complex and more expensive than one single trust.