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One downside of an educational trust with a general pot

| Nov 9, 2018 | Estate Planning |

When creating an educational trust for multiple heirs — three grandchildren, for instance — people will sometimes elect to put all the money into the same “pot.” They just set up a general fund and all three heirs are allowed to take the money out and use it for college-related expenses.

This can work, and it is one of the simpler ways to craft an educational trust. It saves you from having to set up an individual trust for each person.

There are a few downsides, however. One of the main ones is that the shares each person gets may not wind up being equal, and this can create resentment. Feelings may get hurt.

For instance, imagine that one child does not go to college at all, but instead opts to start their own business. The other, wanting to stay close to the family, goes to a local community college. The third, focused on only the best possible education, flies across the country and goes to Yale.

It is clear that the heirs do not have the same needs. Should one child really get to pull Yale tuition out of that general pot, while the other pays for community college? Yale costs over $70,000 per year. Community college may cost just a few thousand dollars. Meanwhile, that last child doesn’t have any tuition costs and gets nothing.

This type of trust may also accidentally circumvent your actual wishes. Would you rather that each child got the same amount to use as they saw fit? Do you want to make sure that the heirs get along with each other and receive an equal inheritance?

These are important questions to ask, and it is critical to carefully consider all the legal options you have as you set up a trust as part of your estate plans.