Column: Estate Planning Options for Beneficiaries with Substance Abuse Problems
While leaving an inheritance to someone should be carefully planned, leaving an inheritance to a dependent person requires special care.
– Many families today are forced to face the problems and pain of a loved one suffering from addiction. The afflicted party may be addicted to drugs, alcohol, or other substances, or they may be suffering from behavioral addictions such as gambling, shopping, eating, or sex. With any of these addictions, an inheritance of money or other assets can quickly make the problem worse.
While leaving a legacy for someone should be carefully planned, leaving a legacy for someone with an addiction (past or present) requires special consideration. Giving an addict an inheritance of any amount could fund destructive or even fatal behavior, while disinheriting him can mean he can never get the help he needs to recover. There are better options.
Talk to your advisors
Placing the inheritance of a beneficiary with an addiction into a trust should be discussed in depth with your estate planning attorney and other professional advisers. The concern about an heir’s addiction cannot be addressed if your advisers are not aware of the problem. Don’t be embarrassed or unsure if you have to say something. Doing nothing shouldn’t be an option. In fact, if you die without a will or trust, a spouse or child with an addiction problem is likely to receive assets under California intestate inheritance laws, which could spell disaster. Not planning is a plan… it’s just not the right one.
Consider a trust
In contrast, setting up a trust to hold certain assets for the benefit of a beneficiary with an addiction can help promote recovery rather than hamper it. A trust provides for a beneficiary while protecting it from themselves and their creditors. A well-written trust will set out your objectives in establishing the trust and provide specific instructions to the trustee on how and when distributions can be made to the beneficiary. You can clarify that the trust is not a “punishment” of the beneficiary, but rather should be viewed as a resource to help a sustainable recovery.
Depending on the size of the inheritance, a trust might just provide for basic needs: medical care, food, and shelter. The trustee can make these payments on behalf of the beneficiary, rather than delivering the funds directly to them. The trust may also include provisions for rehabilitation, counseling and other forms of treatment, and allow assistance (to the trustee or beneficiary) from qualified professionals with knowledge of the particular substance abuse problem.
Terms of trust
It is important that the trust is written to accommodate a dynamic rather than a static situation. An addict will have different needs (and problems) than an addict with 30 days of sobriety. An addict with years of recovery will again have different needs. The trustee should be given the opportunity to adapt accordingly. Consider incentives to motivate the recipient to seek treatment, or that allow more flexibility in distributions when certain goals are met.
The trust should also spell out what a trustee can and should do if they suspect a substance abuse problem. For example, the trustee may be authorized to require drug tests or a consultation with an addiction expert before distributions. A recipient may be required to be clean and sober for a period of time and / or to attend support groups regularly. The trustee should be allowed to make distributions on behalf of the beneficiary (eg payment directly to an owner) rather than to the beneficiary directly.
Finally, the trust must take into account that the beneficiary may one day receive or become eligible for government benefits. Distributions from the trust should be designed so as not to interfere with the beneficiary’s eligibility for benefits.
Selection of trustees
Because the trust will have these specific terms and dealing with a dependent person can be extremely difficult, special consideration should be given to the selection of the trustee. The trustee is the party responsible for carrying out the terms of the trust you have carefully crafted. The part with the addiction problem shouldn’t be the trustee, it’s actually the same as giving them money.
Choosing a family member as a trustee, while perhaps allowing some privacy, can create significant problems. If the addicted child has consumed substantial financial and emotional resources from the family, the siblings may have resentment that will interfere with their fiduciary duties. Likewise, the dependent person’s child is usually not a good choice as a trustee, as family dynamics are likely to interfere.
Consider a professional third-party trustee, whether it is a private trustee or a corporate trustee (bank or other trust company) with the experience and resources to deal with the specific addiction. A third party, although perhaps more expensive in the short term, is able to maintain a distance and make decisions without passion, based on your carefully crafted confidence. And the professional trustee isn’t likely to harangue, emotional phone calls or bad behavior across the holiday dinner table.
If a loved one suffers from drug addiction, be sure to encourage them to have their own healthcare directive and power of attorney in place. You will be in a better position to help them in an emergency.
As difficult as the relationship with a loved one with an addiction can become, things can get worse if you don’t plan for what will happen when you are no longer there. The best solution is to work with a knowledgeable professional to put in place a plan that protects your heir and your inheritance.
Teresa J. Rhyne is an estate planning and trust administration lawyer in Paso Robles, California. She is also the # 1 New York Times bestselling author of “The Dog Lived (and So Will I)” and “Poppy in The Wild”. You can reach her at [email protected]