Trusts for Children: Pooled Trust versus Separate Trusts

Trusts are an advantageous mechanism for structuring the legacy that people leave to their next of kin, but not all trusts are the same. This post discusses two different methods for providing for children in Trust: the Pooled Trust versus Separate Trusts.

The Pooled Trust

A Pooled Trust is a trust that “pools” assets for several beneficiaries. For example, a pooled trust might dictate: “My Trustee shall distribute the principal and income of the trust for the benefit of any of my children and grandchildren as the Trustee determines in his discretion. The Trustee is not required to treat such issue equally.

Separate Trusts

Instead of pooling assets for multiple beneficiaries, a trust could divide into Separate Trusts for each beneficiary. For example: “My Trustee shall divide the Trust into as many equal shares as there are children of the Grantor.

So Which Is Better?

Deciding whether to use a pooled trust or separate trusts depends on your individual circumstances. That being said, here are some common considerations that help to make the decision.

The Size of the Trust

There is a cost associated with administering a trust.  Therefore, for smaller trusts, the time and expense of administering separate trusts may outweigh the benefits. Conversely, a larger trust could split into several separate trusts, each large enough to support their own expenses and accomplish their own objectives.

The Needs of the Beneficiaries

If the beneficiaries of a trust are all professional adults with no major financial concerns, then parents may decide that providing equally-sized, separate trusts is the fairest way to provide an inheritance. If, however, one of the children has a special need, or other concern, then the parents may want to leave more money to that particular child, or provide for them in a different way. In some situations, especially with younger children, parents may not know whether one child will have greater financial needs than the other children. In this case, a pooled trust gives the Trustee flexibility to provide more for a child with greater needs, or to provide equally if the children have equal needs.

The Number of Beneficiaries

Dividing a trust into separate trusts for two children is relatively easy. But what if you want to provide for your four children, ten grandchildren, and two great-grandchildren? If you use separate trusts, it could get tricky. But pooled trusts can also be cumbersome when there are many beneficiaries. I often advise clients to use separate trusts for their children, but to use pooled trusts for their grandchildren or later descendants. This is especially helpful when you want to provide for grandchildren born after your death.

Of course the ultimate decision involves a careful weighing of these and other factors. In order to create the best plan for your family, you should discuss these matters with an estate planning attorney. If you happen to live in Massachusetts, especially in the North Shore, Merrimack Valley, or Greater Boston areas, I would love to help.

PS. Here is another post on structuring Trusts for Children

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