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Patricia Annino
Patricia Annino
Does Your Client Have a Beneficiary With a Substance Abuse Problem?
How you can help with this estate planning conundrum.

February 16, 2012
by Patricia Annino, JD, LLM

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. 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 adviser 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 healthcare proxy and his attorney in fact under the durable power of attorney. In other words, for healthcare proxy it is one at a time, while for the attorney under durable power of attorney can be two. Without these documents, Health Insurance Portability and Accountability Act of 1996 (HIPAA) will prohibit the parents from being involved with his treatment. Also, these documents give parents legal access to 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 adviser, 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 advisers 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 advisers 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.

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Patricia M. Annino, JD, LLM, is chair of the Estate Planning Practice Group at Prince Lobel Tye LLP. She is a Fellow of the American College of Trust and Estates Counsel.

* The AICPA’s PFP Section provides information, tools, advocacy and guidance to CPAs who specialize in providing tax, retirement, estate, risk management and investment advice to individuals and their closely held entities. PFP Section members, including PFS credential holders will benefit from additional resources on this topic in Forefield Advisor on the AICPA’s PFP website at aicpa.org/pfp. All members of the AICPA are eligible to join the PFP section. For CPAs who want to demonstrate their expertise in this subject matter, apply to become a PFS Credential holder.