Estate Planning for Parental Nightmares: What if Junior is a Substance Abuser?
By James LanhamDecember 29, 2016
The Substance Abuse and Mental Health Services Administration tells us that in 2014, 22.5 million Americans aged 12 and older self-reported needing treatment for alcohol or illicit drug use. If your adult child is a known substance abuser, her share of your estate can be held in trust and used for her lifetime benefit based upon the trustee’s determination of the child’s needs. If your children are minors, and you are concerned that after you are gone there should be controls in place should a child become a substance abuser, a trust for children can include trustee authority to test for substance abuse and provide for alternate distributions should substance abuse be present. Two key options to control a substance abusing beneficiary’s inheritance are the wholly discretionary trust and a substance abuse dependency clause.
A wholly discretionary trust is a trust designed to hold a child’s inheritance with the trustee having the full authority to distribute all, some or none of the trust income and principal. This trustee will effectively assume the financial aspects of parenting of a child with your assets if you are deceased. You are designating an individual or corporate (typically a bank trust department) trustee with the authority to decide how much or how little of the trust assets and income will be used for your child on a day to day or annual basis. A primary benefit of a wholly discretionary trust is that the beneficiary cannot legally force the trustee to spend a single nickel on the beneficiary. If drug dependency or alcoholism are apparent, the trustee can refrain from distributing money to the beneficiary and instead pay bills (rent, groceries, utilities, insurance, etc.) for the beneficiary or simply withhold all distributions. The trustee could impose conditions for spending trust funds such as promising a distribution once drug testing shows that the beneficiary is clean of drugs.
A substance abuse dependency clause is sometimes utilized by clients as a trustee tool enabling the trustee to tie distributions to clean drug tests or successful rehabilitation. The trustee can be mandated to require drug testing for a beneficiary prior to distributing funds to the beneficiary. The clause can allow the trustee to use broad discretion in how, when and where tests will be administered, or there can be specific details about the tests and effects of results. The trust can be designed to suspend distributions to a substance abuser or to completely terminate such beneficiary’s distribution rights. For an adult child who is a known drug abuser, the trust might require, for example, that the child be tested weekly and be drug free for a year before trust distributions could be made to that child. The trustee might still have authority to pay the beneficiary’s bills until clean, or the trust might give that child’s share to charity after a year if the drug testing continues to show abuse.
Whether using a wholly discretionary trust or a substance abuse dependency clause, a key factor is deciding who will serve as the trustee standing between trust funds and a drug dependent beneficiary. Clients often choose a sibling for this role which inadvertently creates a conflict between the siblings after mom and dad are gone. A child may be more than willing to help a dependent sibling but not necessarily want to be cast in the role of receiving daily requests for money that must be denied in the dependent’s best interest. You are transforming the sibling trustee’s role from loving sibling to strict parent which can potentially poison the sibling relationship for life. A corporate trustee or an independent person serving as trustee (or an independent trust advisor whose role is to determine sobriety) may enable siblings to serve as friends and advocates for dependent siblings rather than being adversaries.
Feel free to contact our estate and trust planning certified specialists if interested in utilizing substance abuse dependency clauses or wholly discretionary trusts for these purposes. Sometimes protecting children entails protecting them from themselves, a task which a properly drafted trust can accomplish.