Determining how to address substance abuse and addiction among your beneficiaries can be a sensitive and difficult decision.
Planning to pass down your legacy often requires you to address difficult questions and make hard choices. One of the most challenging topics to consider is substance abuse, and, more specifically, how your plan will function if a child or grandchild develops a drug or alcohol addiction problem. For families with a history of substance abuse, this can be a core consideration when drafting documents.
Trusts, trustees and discretion
The topic of substance abuse usually comes up when deciding how to structure an inheritance. Significant inheritances are almost always structured in the form of a trust, which offers important legal and tax protections to the beneficiary. In recent decades and especially among wealthy families, trusts have become increasingly discretionary, with authority granted to the trustee or some other fiduciary to make decisions about the amount and timing of distributions to beneficiaries. Depending upon the circumstances, the trustee’s discretion in making distributions may be either absolute or limited by specific standards (such as making distributions for the “health, education, maintenance and support” of a beneficiary). It is usually in this context that the issue of a beneficiary’s possible substance abuse is considered.
With the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019, there are additional distribution considerations that are important to keep in mind when funding a trust with retirement assets. Because the SECURE Act requires the entire balance of retirement assets be distributed 10 years after the death of the account holder, a beneficiary may receive larger or accelerated distributions than originally intended and without proper planning.
Why you might exclude specific provisions
Some may argue that as long as a trustee has sufficiently broad discretion to make and withhold distributions, there’s no need for specific substance abuse provisions. This school of thought maintains that if a trustee can reasonably withhold distributions from a beneficiary with an active drug or alcohol problem and make distributions to get a beneficiary into a treatment program, specific language about substance abuse isn’t required.
In this view, express provisions on substance abuse might wrongly stigmatize the beneficiaries, suggesting a problem is present where none exists. Supporters of this view also point to the potentially negative consequences of treating a child who is struggling with an addiction problem differently in a planning document than his or her siblings.
However, there’s strong resistance to the view that trustee discretion is sufficient to address substance abuse problems among beneficiaries.
Why you might include specific provisions
Some believe that trustees and other fiduciaries will be unlikely to cut off distributions to a trust beneficiary with an addiction problem, fearing long-term disputes and litigation. Even professional trustees such as banks, trust companies, attorneys and accountants may be hesitant to forcefully intervene with a substance-abusing trust beneficiary. Indeed, some professional fiduciaries may be hesitant to act as a fiduciary at all for a beneficiary with a known addiction problem.
Moreover, many fiduciaries – whether professionals or loved ones – may have little knowledge of treatment options for different kinds of substance abuse. For example, a trustee selected for his or her financial acumen or family knowledge may have no understanding of how to deal with opiate addiction in a 20-year-old beneficiary residing in another state.
For these and other reasons, clients who are sensitive to drug and alcohol addiction in their families often insist on seeing express provisions in their planning documents that address these issues.
Typical substance abuse provisions
How do planning documents expressly address substance abuse and addiction? Provisions can vary widely and range from relatively simple to very detailed, but here are a few commonly used features:
- The existence of dependence or addiction: A definition is given to conduct constituting substance abuse, establishing how it will be evaluated. The trustee is often given discretion to determine whether the beneficiary’s substance abuse has had consequences that could lead to actual harm to the beneficiary or his or her assets.
- The requirement of testing: If substance abuse is suspected, the trustee may request or require the beneficiary to undergo testing to qualify for distributions. Consent to disclose test results to the trustee is usually required to resume distributions.
- Suspension of discretionary and mandatory distributions: Until test results are received, and in the event of adverse findings, the trustee may be directed or authorized to withhold distributions from the beneficiary. These may be discretionary distributions (requiring the exercise of discretion by the trustee) or mandatory distributions (such as requirements that certain amounts be paid out upon the beneficiary attaining specified ages).
- Treatment: Substance abuse provisions often authorize or require a beneficiary to enter or complete a treatment or counseling program before distributions may resume. Trustees may (understandably) be given wide latitude to determine what constitutes successful completion of a treatment program.
Substance abuse provisions are often expected to be automatic or self-triggering, but this is rarely the case. Provisions usually require a fiduciary to make a number of very difficult determinations that may fall outside their area of expertise. Does a beneficiary have a drug or alcohol problem? Has the problem risen to the level that it has a negative impact on the beneficiary’s life, occupation or family? How should the topic be raised with the beneficiary, and how should testing requirements be presented? What treatment options should be considered? What determines if treatment was successful?
“Who’s the decision-maker?”
Whether or not a planning document contains detailed provisions on the subject of substance abuse, the most important question is always “Who is the decision-maker?” Planning protections for a beneficiary facing addiction are only as strong as the individual or group charged with administering their trust. Any legal structure may lead to good or bad results, depending upon the willingness of the decision-maker to engage with the beneficiary, obtain professional advice and remain involved.
Deciding who to serve as the decision-maker can be a daunting task. Many families don’t have a single individual with the knowledge and disposition to act as fiduciary for a person with a substance abuse problem. Families may find it necessary to assemble a “committee,” drawing from legal counsel, financial advisors, treatment professionals and others to be the joint decision-makers for family members struggling with drug and alcohol addiction.
In spite of these challenges, any concerns you may have on the subject of substance abuse and addiction should be raised openly in planning discussions with your financial advisor, attorney and other planning professionals. Open communication will only help lead to a more thoughtful plan that reflects what matters most to you.
Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. All expressions of opinion reflect the judgment of Raymond James and are subject to change.