Estate Planning Conundrum: What to do when a beneficiary has a substance abuse problem

In my 25 years of working with families on their estate plans, many parents have raised the issue of what to do when a child or grandchild struggles with substance abuse. With the recent death of Whitney Houston and her connection to substance abuse, it reminds me of what this means during the estate planning process. These parents are heartbroken and need guidance on how to address this difficult situation in their estate planning documents. Substance abuse – whether it’s alcohol, prescription drugs, or illegal narcotics – affects many of the families we advise. As a result, we developed a list of questions for families to consider when designing their estate plan:

  1. Has the beneficiary ever been diagnosed with a mental illness?
  2. Is the beneficiary having a particularly hard time – is divorce on the horizon? Has he lost his business? Does he gamble?
  3. What is his relationship with other family members?
  4. Who does he trust?
  5. Who is giving him money?
  6. Is he eligible for government assistance?
  7. Who is paying his health insurance?
  8. Is he employed? For how long? What types of jobs?
  9. Has he ever been treated for his addiction?
  10. Is he a member of Alcoholics Anonymous or a similar organization?
  11. Do these issues run in the family?
  12. Has there been a family intervention?
  13. Is he open to counseling? Has this topic been addressed?
  14. Where is he living? Can he live alone?

I have noticed that substance abuse often masks other underlying mental health issues, including undiagnosed or untreated schizophrenia, bipolar disorder, and depression. That these issues are often part of a larger family pattern makes having the discussion much more difficult, but much more essential.

Families in Conflict

An addicted child may have already taken a significant emotional, physical, and financial toll on the entire family. Parents who find it difficult to handle this child become increasingly disturbed when they consider who would step in if they are unable or unavailable. This helplessness often leads to anger, frustration, and conflict.

One parent may want to cut off the beneficiary while the other parent cannot consider doing so. One parent may want to kick the child out of the home, while the other parent believes that doing so would make matters worse. These conflicts add stress to their marriage and the family at large.

Grandparents may have different opinions than the parents. Siblings may already be resentful of their addicted sister or brother. In many families, the troubled child has already received significant emotional and financial assistance. His troubles have already taken center stage at the dinner table. His presence in the home and attitude toward the family may have already created constant disruption.

Estate Planning Tools and Options

As complex and emotional as these issues are, families must address them. And they will welcome having an impartial, yet compassionate advisor to provide guidance, suggestions, and choices.

One planning tool for parents to immediately consider is for that child to designate them as the agent under his health care proxy and his attorney in fact under the durable power of attorney. Without these documents, HIPPA will prohibit the parents from being involved with his treatment. Also, these documents give parents legal access to his health and financial records, which could be extremely important if it becomes necessary to apply for government benefits.

Inevitably, an estate planning discussion will include disinheritance. In my experience, this is a subject frequently discussed and rarely implemented. No matter how angry and frustrated they are, parents still want to provide some sort of safety net for their child.

This pressure to disinherit the troubled child may come from the sense that he has already taken more than his fair share of the family’s resources, possibly at the expense of the other, more responsible children. As the family’s advisor, however, you should ask the parents:

  • If you are not here, how will the child be cared for with no existing financial resources?
  • Who will be responsible?
  • Who will he call?
  • Will disinheriting him place a financial burden on your other children, or will they be able to walk away?

Establishing a Trust

Rather than disinheriting him, a common solution is to establish a trust that includes him as a permissible beneficiary – or is only for his benefit during his lifetime. The hard decision, however, is who will serve as trustee after both parents die. Parents are understandably reluctant to place that burden on their other children or on other relatives.

If there are significant assets, then choosing a corporate trustee is the simple choice. The other children or trusted friends or advisors can then have the right to remove or replace that trustee during the trust duration. If there are not sufficient assets to warrant a corporate trustee, then the parents must identify friends or trusted advisors – who should be paid for their services. The trustee should review the trust document to ensure that he has the right to resign from his office, and understand the mechanism for subsequent trustee appointments. The document should provide the trustee with the authority to expend funds for purposes such as counseling, detectives, drug testing, and private security.

Trust Terms and Provisions

After deciding on the line of succession and identifying who will operate the trust, parents need to focus on the various purposes for which the trustee may or may not distribute income and/or principal from the trust to the beneficiary.

If the beneficiary is likely to require government assistance, then the terms of the trust must contemplate that. The trust document may also give the trustee authority to withhold payments if deemed advisable. This is often preferable to asking that trustee to determine whether a beneficiary is drug-free. Those suffering from substance abuse can be clever, and making such a determination is tricky.

Rather than withholding payments, another approach is to provide the beneficiary with incentives for staying clean. The trustee could provide additional distributions if the child holds a full-time job or regularly attends  counseling sessions. Making the distribution provisions restrictive and under the trustee’s sole control can help protect those assets from the troubled child’s creditors, or from any of the many “friends” and acquaintances who might take advantage of him if they believe there is money in his pocket.

Many parents have a sense of shame or denial, and may rightly choose not to make these troubles public, or put them in a trust document that others can access. I encourage parents to write an annual side letter to the trustee that describes their observations and offers details that they are reluctant to share while living. This letter could be placed in a sealed envelope, kept with the original estate planning documents, and updated/revised as circumstances change. It can be comforting to the trustee to understand more about the parents’ goals and objectives from their own voice.

Planning for the beneficiary with a substance abuse issue is complex and can have consequences that affect the entire family. Remind parents that life is a movie, not a snapshot. A plan created now should be good enough to handle today’s circumstances, yet flexible enough to contemplate the unknown. Encourage parents who are dealing with this difficult situation to revisit their plan every few years as circumstances change and evolve.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit, http://www.patriciaannino.com.

Comments

  1. Patricia, this is a wonderful summary of the issues to consider and some avenues to explore. I have only had the issue pop up in my practice once before, and I have to say,aside from some limited personal experiences with addicts, I didn’t know much in the way of legal planning for these individuals. I like your suggestion of incentive inclusions in a trust. What advice do you give to parents involved in this sort of planning if they would like to consider the possibility that the child could get sober at some time in the future? Incentives work to help them down that track, but other than revisiting the plan in the future, have you used any other tactics or mechanisms to permit the child more freedom as their sobriety progresses?

    • Michael, thank you for your comment. One of the problems I have seen is that once a person is an addict what they are addicted to may change but slaying the underlying dragon is really really hard- and when people want to cover they are very clever- that is why I think one of the most important decisions is who serves as trustee in my experience all estate planning has two necessary and orthongoical components- organizational (how the documents are drafted) and operational – how they are operated. Side letters to trustees, successor trustees, criteria for who would serve on the fiduciary team are all so important. Especially in cases involving addiction and mental illness it is so hard when viewing life as a movie not a snapshot to look in the crystal ball. Patricia

  2. A curt order usually does the trick by appointing an independent trustee

  3. Matthew Buyer says:

    This is a good article and obviously the author has had some experience in this arena; but I would suggest it doesn’t address some of the more serious consequences of addictions from a fiduciary’s perspective. What if the beneficiary is entangled to the point of perhaps committing suicide (whether intentionally or unintentionally) or frequent emergency room visits and the irrevocable trust instrument will not allow distributions due to the beneficiary’s current behaviors based on an unwillingness to change the self-destructive/non-productive behavior? Does the Trustee pay the health insurance? Provide a place to live? Prescriptions? Living expenses? Medical expenses not related to the addiction? Medical expenses related to the addiction? What if the beneficiary is on the brink of death – what should the fiduciary do when the family has been unable to effect any changes in behavior? Have you ever had to have someone committed to an institution for addictions against their will? Thanks for your article.

    • Excellent points. Yes I have had clients committed against their will several times- very tragic. All the cases I have seen that in have not been substance abuse cases – they have been cases involving schizoprhenia. You raise some very excellent points and I would add to it the issue of trustee liability and ability to coordinate with the health care agent and/or guardian – another real issues I have seen is that when the person who is in “charge of” the person and health is not on the same wavelength as the person making the financial decisions chaos ensues. Thank you for commenting. Patricia

  4. Great article, Patricia! As the director of a treatment program that deals specifically with the underlying causes of all kinds of addictions (and as a former addict, myself) I agree with your reply to Michael that just because a person may have stopped drinking or drugging, they have not necessarily stopped the addictive cycle. An addict will substitute addictions if they do not address and heal what drove them to the relief of alcohol, drugs and eating disorders in the first place. And even if someone doesn’t continue with any apparent addiction they may use spending and financial irresponsibility as yet another form of chaos that they attract into their lives, based, yet again, on the persistent of those underlying causes. Having controls of the inheritance and leverage to help the addict move toward real recovery is sometimes the best hope the addict has of breaking free. Thanks for the topic!

  5. Anna Byrne says:

    Excellent article! I have a case right now and the parents are stuck. I like the idea of the annual side letters.

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