John Stinar
John Stinar

The use of trusts in estate planning continues to be a hot topic among estate planning professionals and their clients.

For example, whether or not to use a revocable living trust to avoid probate continues to be a widely discussed option. The purpose here, however, is to discuss trusts in another arena of estate planning. Specifically, how does a client leave his estate to his children and whether the use of a trust is appropriate. This article will discuss two types of trusts that parents can use when transferring their wealth to children.

These are called testamentary trusts, meaning they are not established until the client is deceased. The trust lies dormant in a client’s will until it is effectuated at the client’s death. There are two types of testamentary trusts to consider.

The “three strikes and you’re out” trust is typically used where a client has minor children. Since the children are minors, they are not legally able to own the assets transferred to them at a parent’s death. If a trust does not exist, those assets would have to be held in a conservatorship, which can be time-consuming and expensive to establish and administer. The trust established for minor children under a parent’s will would provide distributions for health and education, maintenance and support. If a child goes to college, the trust would pay for books, room and board, and tuition. If the child needed a car to commute to and from college, the trust could buy the car; the child simply could not have the ability to choose a Lamborghini over a Ford Explorer. The type of car would be determined by the trustee of the trust, someone other than the child.

The trust then would provide for distributions of principal, free of any control by the trustee at specific ages. A common scheme to distribute is one-third of the trust at ages 25, 30 and 35. The theory is that if a child makes a mistake and unwisely spends the first third he or she receives, the child may be more mature and thoughtful when receiving subsequent installments.

The “stealth prenuptial” trust can be established for adult children in a risky business or profession, and the parent wants to provide some asset protection for the child.

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This trust can also be used for a financially immature adult child or an adult child who cannot say no to a financially immature spouse. In both instances (i.e., asset protection and financial immaturity), the trust is for the life of the child.

Where the client is trying to provide asset protection for the surviving child, the child is typically his or her own trustee upon reaching a certain age, e.g., 35. Where an adult child is not financially immature or cannot say no to a financially immature spouse, the child is a co-trustee along with a third-party trustee. The co-trustee would be a trusted family member, an advisor or an institution such as a bank trust department.

The advantage of a third-party trustee is that they will act as a governor over the child in making bad financial decisions. Again, income and principal of the trust would be distributed for the child’s health, education, maintenance and support. The trust should augment the child’s lifestyle for his or her entire life.

In selecting a third-party trustee, a preference can be to use a corporate trust department. Corporate trust departments are very effective managers of money for an adult child. It is important to provide that the adult child can always replace the corporate trustee with another corporate trustee. This allows for effective negotiation of trustee fees and flexibility in whom the child wants to work with in administering the trust.

The use of trusts in estate planning can be confusing. There is no right or wrong answer to many questions and concerns facing clients. The two trusts described here are simply two examples of what a client and an estate planning professional should be discussing to see what fits the client’s particular situation.

John M. Stinar is an attorney with Stinar & Zendejas LLC, a full-service business and estate planning firm. Find more information at or call 635-4200.