Column: Estate planning options for beneficiaries with addiction problems

Posted: 5:22 am, November 11, 2021 by Guest Contributor

Local attorney Teresa J. Rhyne

While leaving an inheritance to anyone should be carefully planned, leaving an inheritance to a person with an addiction requires particular attention

– Many families today are forced to deal with the problems and pain of a loved one suffering from addiction. The afflicted party may suffer from addiction to drugs, alcohol, or other substances, or they may suffer from behavioral addictions such as gambling, shopping, eating, or sex. With any of these addictions, an inheritance of cash or other assets can quickly escalate the problem.

While leaving an inheritance to anyone should be carefully planned, leaving an inheritance to a person with an addiction (past or present) requires particular attention. Giving an addict an inheritance of any amount outright could be funding destructive, even fatal, behavior, while disinheriting them may mean they are never able to get the recovery help they need. There are better options.

Talk to your advisors

Putting the inheritance of a beneficiary suffering from an addiction into a trust should be discussed thoroughly with your estate planning attorney and other professional advisors. The concern about an heir’s addiction cannot be addressed if your advisors aren’t aware of the issue. Don’t be embarrassed or unsure if you should say anything. Doing nothing should not be an option. In fact, if you died without a will or trust in place, a spouse or child dealing with an addiction issue will likely receive assets outright under California’s intestacy laws, which could lead to disaster. Failing to plan is a plan…it’s just not a good one.

Consider a trust

On the other hand, setting up a trust to hold certain assets for the benefit of a beneficiary with an addiction can help to promote a recovery rather than interfere with it. A trust provides for a beneficiary while protecting them from themselves and their creditors. A well drafted trust will set forth your goals in establishing the trust and provide specific directions for the trustee as to how and when distributions can be made to the beneficiary. You can make clear that the trust is not a “punishment” of the beneficiary, but rather should be viewed as a resource to aid in sustained recovery.

Depending on the size of the inheritance, a trust could provide simply for the baseline needs—medical care, food, and shelter. The trustee can make those payments on behalf of the beneficiary, rather than handing funds directly to them. The trust might also include provisions for rehabilitation, counseling, and other forms of treatment, and allow for assistance (to the trustee or the beneficiary) from qualified professionals with knowledge of the particular addiction issue.

Trust terms

It is important that the trust be drafted to adapt to a dynamic situation rather than a static one. A person in the throes of their addiction is going to have different needs (and issues) than an addict with 30 days sobriety. An addict with years of recovery will again have different needs. The trustee should be given the flexibility to adjust accordingly. Consider incentive provisions to motivate the beneficiary to seek treatment, or that allow for more flexibility in distributions when certain goals are met.

The trust should also specify what a trustee can and should do if they suspect an addiction issue. For example, the trustee can be allowed to require drug testing or consultation with an addiction expert prior to distributions. A beneficiary can be required to be clean and sober for a certain time, and/or attend support groups regularly. The trustee should be permitted to make distributions on behalf of the beneficiary (e.g. payment directly to a landlord) rather than to the beneficiary directly.

Finally, the trust should take into consideration 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.

Trustee selection

Because the trust will have these specific terms and dealing with an addicted person can be extremely difficult, careful consideration should be given to the selection of the trustee. The trustee is the party charged with carrying out the terms of the trust you’ve carefully designed. The party with the addiction issue should not be the trustee—that is effectively the same as handing them cash.

Choosing a family member as trustee, while perhaps allowing for some privacy, can create significant issues. If the child with the addiction has consumed substantial financial and emotional resources of the family, siblings may have resentment that will interfere with their duties as a trustee. Likewise, the child of the addicted individual is usually not a good choice as trustee, as the family dynamics are likely to interfere.
Consider a third-party professional trustee—either a private fiduciary or a corporate (bank or other trust company) trustee with experience and resources dealing with the specific addiction. A third party, while perhaps more expensive in the short run, is able to maintain distance and make decisions dispassionately, based on your carefully crafted trust. And the professional trustee is not susceptible to haranguing, emotional phone calls, or bad behavior across the holiday dinner table.