By Attorney Amanda N. Follett, Schloemer Law Firm, S.C.
Addiction and abuse of alcohol and drugs is a growing issue in our community, and clients should consider whether their estate planning documents should be updated to protect their estate beneficiaries. Addiction is devastating to everyone and does not have any limits regarding income, community location, age, race, or gender, and our clients are best served by specifically planning for it to protect their families.
It is especially important to be proactive in your estate planning when a beneficiary of your estate is addicted to or abuses alcohol or drugs. If a child has an alcohol or drug addiction, receiving a large sum of money through an inheritance is the last thing that would be in their best interest.
While it is a difficult topic for many, it is important to be up front with your estate planning attorney if this is a concern. Addressing the issue head on is the best way to ensure that an inheritance can be used to care for and provide for your beneficiaries, and not used to further the addiction.
If abuse or addiction is a concern, we recommend clients consider trusts for their beneficiaries. There are several provisions that we have found to be helpful in these types of trusts:
- How long should funds be held in Trust?
Generally, we recommend that an inheritance be held in trust until at least age 25, or when a beneficiary is more mature and better able to handle an inheritance. Receiving an inheritance at too young an age can make the beneficiary an easy mark for those who would take advantage of them. Requiring the funds to be held in trust until a beneficiary is older and has had an opportunity to learn some of life’s lessons is one of the best ways to protect a beneficiary from others and—just as importantly—from themselves.
If there are concerns with alcohol or other drug abuse or addiction, we recommend that funds be held in trust for a longer period of time, often up to lifetime.
The beneficiary can still receive distributions from the trust and benefit from the funds. However, they are prevented from making decisions about investment and distributions; these decisions are in the control of the Trustee.
- Who should be the Trustee?
We recommend that clients carefully select who should be the Trustees of such a Trust.
Generally, Trustees must make decisions about when to distribute funds for health, education, care, maintenance, or support of a beneficiary. Trustees must also make decisions regarding investments, file tax returns, and otherwise manage trust assets.
Deciding who to name as the trustee of a Trust for a beneficiary can be a difficult task. If a family member is named, the family member should be capable of managing trust assets, making sound decisions regarding distributions, and be able to handle the emotional aspects of being placed in such a role, such as inter-family confrontations. For example, if a sister is acting as trustee over a brother’s trust, confrontations may arise if the brother wants funds, and the sister doesn’t believe that distributing them will be in his best interest.
If a lifetime trust is required for a beneficiary, we often recommend naming a corporate trustee over a family member. A corporate trustee is impartial and helps avoid friction that can arise in these situations within the family. It is easier for a corporate trustee to say “no”, or “yes, but only if….” than it is for a family member. Corporate trustees do charge fees, and some corporate trustees have account size minimums.
If you are considering a corporate Trustee, you should interview the potential Trustee to make sure that you are comfortable with them and that they can adequately support your loved one and manage Trust assets. There are several local corporate Trustees we have worked with who have experience in handling these types of situations.
- What provisions should be considered in an AODA Trust?
Individuals that are concerned with leaving funds to a loved one with an addiction should consider specific provisions to ensure that the funds are not used to continue their addiction.
We recommend including specific provisions to alert the trustee and future trustees that the beneficiaries has issues with an alcohol or drug addiction. An informed trustee will be able to make better decisions.
We also recommend that the Trust contain a provision allowing that the beneficiary request funds to be used to pay for expenses for professional rehabilitation, treatment and services. In such a case, the disbursement should not be paid to the beneficiary, but should be paid directly to the facility or professional rendering such rehabilitation treatment or services. Direct payment of bills avoids the beneficiary having the cash in hand. The Trustee should have the final say in determining the appropriateness and qualifications of the treatment or services as requested.
Similarly, the Trust should contain a provision stating that the Trustee has discretion to make payments or apply funds directly on behalf of the beneficiary for health, support, care, maintenance, and education. Such a provision would allow the Trustee to make direct payments on the beneficiary’s behalf, or to make distributions to another individual who the Trustee chooses to make payments on the beneficiary’s behalf. In general, the purpose is to allow the Trustee to make payments so that bills are able to be paid without actually giving the child cash, which could be used to purchase drugs or alcohol.
We also recommend that the Trustee be permitted to require the beneficiary to be evaluated by an alcohol or other drug addiction certified medical professional. The Trustee can also require that the child comply with all treatment as determined and all testing in order to receive distributions.
The Trust must contain a provision that the beneficiary consent to full disclosure to the Trustee of all medical and other information relative to the assessment, testing, and treatment, and shall execute the necessary consents under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and other similar laws and regulations in effect of such disclosure. If such a provision is not included, there is the danger that due to HIPAA laws, the Trustee may not be able to access the beneficiary’s medical records. Furthermore, the Trustee should have the power to disclose the information in the Trustee’s discretion.
The Trust can also include provisions either prohibiting or permitting a Trustee to decide to refrain from making distributions based on a period of sobriety.
The Trust should also provide how the Trust assets will be distributed upon the death of the beneficiary. Many individuals provide that the Trust assets will be distributed to their child’s children (i.e. their grandchildren), but if there are no grandchildren, then to their descendants then living by right of representation; in other words, their other surviving children or grandchildren. The Trust can provide the beneficiary with a “power of appointment” to decide how any remaining funds will be distributed. One of the dangers of providing a general power of appointment and allowing the beneficiary to choose how the Trust will be distributed on their death is that the Settlor (i.e., the creator of the Trust) may not agree with how the beneficiary wants the Trust distributed. For example, the beneficiary may decide to leave the Trust to a spouse or significant other, who may also be a part of the addiction problem. Most parents would prefer to have any remaining Trust funds go to their grandchildren or to other children.
Another provision that some parents may wish to consider is a “W2 Provision”. In a “W2 Provision” a parent can choose to make distributions contingent upon the child working, so that in order to incentivize the child to work, for example, the Trust could provide that the Trustee may only make distributions so long as a child is receiving income and has at least a part-time or full-time job, depending upon the parent’s objectives. However, it is difficult to determine what the future will bring, so parents should consider carefully whether they do wish to include such a provision, or if it is preferable to leave these decisions in the Trustee’s discretion.
A more extreme condition that some parents may consider is to include a provision that would provide that if a child tests positive for drug or alcohol use or has a relapse, then the Trust is terminated, and Trust funds are distributed to their other children. In other words, if the child has a relapse, the child loses their inheritance. Such a provision may appear to be a strong incentivizing factor, but the outcome is an extreme outcome as many addicts may be subject to relapses for one reason or another. Terminating the Trust would take away funds that may be needed for treatment or recovery, so a parent should carefully consider this provision before making such a decision. Once you are gone, you cannot undue these documents, and such a decision is permanent.
Other alternatives are to consider a provision that holds the inheritance in Trust for a longer period of time, or if Trust payments should resume once a certain recovery period has taken been completed.
If you have other family members who may be leaving an inheritance to an addicted child, other family members should also be alerted to the fact that a Trust is being created, so that they can also direct any inheritance to the Trust.
- Next Steps
If you would like to meet to discuss your estate plan, please call our office to schedule an appointment.
Originally published: November 13, 2019.
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Disclaimer: The information contained in this post is for general informational purposes only and is not legal advice. Due to the rapidly changing nature of law, Schloemer Law Firm makes no warranty or guarantee concerning the accuracy or completeness of this content. You should consult with an attorney to review the current status of the law and how it applies to your unique circumstances before deciding to take—or refrain from taking—any action. If you need legal guidance, please contact us at 262-334-3471 or [email protected]