Creating Sub-Trusts – the “Tinker Toys” of Estate Planning

Key Takeaways:

• Sub-Trusts are empty legal structures created inside a Master Trust or Will that do not require a separate Tax ID number or asset funding until a specific triggering event occurs.
• Triggering events like the death or disability of a Trustor activate these structures, seamlessly splitting assets into targeted vehicles like a Marital Trust or Credit Shelter Trust.
• Utilizing a common pot Trust protects minor children collectively, while transitioning into separate individual Trusts provides specialized asset management and creditor protection as beneficiaries mature.

I grew up playing with Tinker Toys. That should tell you how old I am. At the writing of this article in 2026, I am 69 years old. You can also tell my age by reading my article about Gilligan and Thurston Howell III. We all loved connecting wood pegs into round holes that were around the perimeter of a wooden circle. This allowed you to build whatever configuration your mind could imagine. And, almost as fun as making it, was breaking it down. Anyway, for those of you who don’t know what a “Tinker Toy” was, google it. And I can promise you that I didn’t know what “google” was until I started to use it.

There are two ways to create Trusts. The most common is to execute a separate document; we call this a “Stand Alone” Trust. When you create a Trust this way, then it is a valid legal entity that has a Tax ID number, and you can transfer property into it. The other way is to create a “Sub Trust” that exists inside of another document; it does not have a Tax ID number, and doesn’t come into existence until you die.

Sub-Trusts can be created inside of another Trust (which we will call the “Master Trust”) or they can be created inside of a Last Will and Testament. (“Testamentary Trust) In either case, the Trust doesn’t get a Tax ID number and can’t own property until some “triggering event”. The critical issue in deciding on a Sub-Trust or a Stand Alone Trust is whether or not you are ready to “fund the Trust” by transferring assets into it.

The triggering event inside of a Will is the death of the Testator. The triggering event inside of a Trust could be a number of different things such as:

1. Death of the Trustor (creator of the master Trust)
2. Certain ages could be a triggering event to take an existing Trust and break it out into multiple Sub Trusts.
3. Disability of the creator of the master Trust could cause a Trust to break out into a Sub Trust.
4. It could even be for a tax reason like owning S Corp Stock. (QSST or an ESBT)

A common example of a Master Trust creating Sub Trusts upon death would be a classic A/B Revocable Trust. As most of you know, this is the most common type of Revocable Trust created by a married couple. Upon the death of the first spouse, the Master Trust splits into two separate Sub Trusts, commonly called a Marital Trust and a Credit Shelter Trust. Upon the death of the first spouse, the Estate Lawyer will “breathe life into the Sub-Trusts”. The Sub Trusts get a separate Tax ID number at that point. The Trustee signs an Acceptance of Trustee document and that Sub Trust can now own property.

Another example would be that you have a master Life Insurance Trust as a common pot for all of your children, which is used to pay the premiums while you are alive. Then, at your death, when the life insurance comes in, the Master Trust then breaks into separate Sub Trusts, one for each kid.

You are starting to visualize why it is like playing with Tinker Toys. We can also have a Stand Alone Trust pour into another Stand Alone Trust. A common example of this is when I create Stand Alone GST Trust (generation skipping trusts) for each of my kids that I gift into while I am alive. And I provide in my Stand Alone Revocable Trust a pour-over provision. Upon my death, the Revocable Trust pours into separate Stand Alone GST Trusts that I created for my kids while I was alive. This way the Trust is funded at two critical points in time. First while I am alive and “gift” into the Trust, then again at my death as my Revocable Trust pours more assets into it.

Once again, the critical point you have to create a Stand Alone Trust is when you are ready to transfer something into it now. Otherwise, if it is an empty shell, it is cheaper to create it inside of a Master Trust.

Another major issue to consider in this discussion is whether or not you are better off with a “common pot Trust” or separate individual Trusts. You may be better off to start out as a common pot Trust and then convert to separate Sub Trusts in the future. Several factors to consider here:
1. It may be important to manage assets in a common pot when the children are minors. You don’t want to break it out into separate pots until the youngest child reaches a certain age. You want to make sure that all of the children are provided the same opportunities while they are minors before splitting off property to the older children.
2. A common pot is also useful if you are doing an Installment Sale to a Grantor Trust. (IDGT) You want one source of the payment and one pile of assets for collateral.
3. You may also want a common pot when the beneficiaries are a group of nieces and nephews, when you want to provide a greater benefit to one vs the other, at different points in time.

Separate Stand Alone Trusts become critical when the kids are older, and you want them to have money to purchase their first home. You don’t want a house owned by a Trust with a group of beneficiaries. Or maybe you want the Trust to help a family member start a business. Separate Trusts are critical when you want separate management of the assets and the assets are intended to be used for more personal “investments” rather than a Trust that has the primary purpose of distributing income to family members for consumption. Meaning, you want to help someone get an education, or with medical bills, or maybe even with support and maintenance. You’re ok with all of the assets in the Trust being used to generate income and then have the income go out to individual beneficiaries.

I believe that this type of discussion justifies the need for competent Estate Planning advice. AI is only as good as the knowledge needed to ask the appropriate questions. The old saying “you don’t know what you don’t know” applies. It takes years of experience with many families in many different situations to truly understand what Trusts are best for what purposes.