Effectively advise clients with a family member suffering from these conditions.
Addiction has become a frequent news headline due to the alarming increase in opioid abuse and heroin use. Addiction manifests itself in many forms and can be behavior based, such as gambling, pornography and compulsive shopping. It can also be substance based, as in alcohol, opioid or other drug addictions. Irrespective of its form, addiction has devastating effects on clients and their families.
Epidemic of Addiction
On Oct. 26, 2017, President Donald Trump declared the opioid crisis a national public health emergency.1 Statistics are startling and indicate that approximately 142 Americans die every day from a drug overdose, the loss of life equivalent to the Sept. 11 terrorist attacks every three weeks.2 Further, a forecast by STAT concluded that as many as 650,000 people will die over the next 10 years from opioid overdoses.3 This growing epidemic of addiction is changing the landscape of our clients’ estate plans, and practitioners need to be prepared.
A multitude of issues associated with opioid and other addictions will cross our desks in the preparation and implementation of estate plans. All addictions tend to produce feelings of failure, guilt and embarrassment on the part of our clients, but opioid addiction tends to inflict particular shame. There are no identifiable causes of addiction (aside from substance abuse), and there’s no way to predict who will become an addict.4 In fact, it’s common knowledge that most heroin users began their use of opioids with a lawful prescription for a valid medical problem. Prescription opiates whose refills have run out are often the gateway for heroin.5 Heroin is cheap, easy to obtain and highly addictive. Opioid addiction is no longer limited to the urban poor; rather, opioid and heroin addicts are found in the suburbs and were raised in “good families.” As practitioners, we must be able to effectively advise clients dealing with a family member suffering from addiction.
Estate Planning for Addiction
Tax planning has been the primary focus of estate-planning professionals for decades. Many practitioners have built their careers on helping families avoid the dreaded “death tax.” However, the dramatic rise in estate tax exemptions over the last few years, coupled with the permanence of portability, has eliminated significant tax exposure for families. Proposed tax legislation again calls for complete repeal of the estate tax. Nevertheless, the need for sophisticated estate plans will persist due to the alarming increase in societal addictions, in particular the opioid and heroin epidemic.
An addict places intolerable emotional and financial strain on a family.6 Clients are fearful of the addict’s unpredictable and sometimes violent behavior, and many families are in constant conflict over the addict. Clients are often divided on how to deal with their child’s addiction and behavior, leading to stress in the marriage, possible divorce and further dysfunction in the family. In addition, the addicted child’s siblings often lack sympathy and harbor resentment against the addict and their parents for financing the situation. So, what are practitioners to do when faced with a family in crisis over addiction?
Estate-Planning Options
Disinheritance. Not surprisingly, the potential disinheritance of the addicted child is a common consideration. Parents don’t want their legacy to fund destructive and possibly deadly behavior. However, caution clients contemplating disinheritance that disinheriting an addicted child could leave the addict destitute and unable to seek treatment. Warn parents considering disinheritance that their addicted child could contest the estate plan, further alienating the beneficiary from his family while wasting estate assets on needless litigation.
Outright bequest. Some parents may opt to leave their addicted child a smaller outright bequest, after having exhausted the child’s “inheritance” during the parent’s lifetime. However, leaving an addicted child funds outright is fraught with issues. The child would now have the financial means to challenge the estate plan, also resulting in expensive litigation, and with full access to his inheritance, the child would have unconstrained funding for his addiction.
Distribution of funds to siblings for the benefit of the addicted beneficiary. Because of the risks associated with an outright bequest, some clients elect to give the addicted child’s inheritance to a sibling, with the understanding that the sibling will expend such assets for the addict’s benefit. There are underlying risks with such an approach, including loss of assets to the sibling’s creditors, mismanagement of funds, refusal to uphold the parents’ wishes, bankruptcy, divorce and death of the sibling, not to mention the inevitable strain on the relationship between siblings.
Trust Planning
Given the shortcomings associated with these approaches, the best option is to create a discretionary trust for the addicted beneficiary.
Discretionary trusts. The most common discretionary trust distribution standard is health, education, maintenance and support (HEMS), as referenced in Internal Revenue Code Section 2041(b)(1)(A) and in Treasury Regulations Section 20.2041-1(c)(2).7 But, the IRC doesn’t define the term “health, education, maintenance and support,” and both the trustee and the beneficiary can have subjective interpretations. As a result, practitioners may wish to consider the use of a purely discretionary trust that gives the trustee the sole and absolute discretion to make (or suspend) distributions to or on behalf of the beneficiary, thereby greatly diminishing the addicted beneficiary’s challenges to the trustee’s actions.
Choice of trustee. Choosing a trustee is difficult. Choosing the right trustee of a trust for an addicted beneficiary is doubly difficult. Many clients are hesitant to place this responsibility on a family member. Naming a bank or trust company may seem like a logical choice, but some corporate trustees are reluctant to serve as trustee for an addict, particularly when the addiction involves an illegal substance.
Language to Include in Trust
Given the complexities involved in the trust administration for a known addict, and to alleviate some of the concerns associated with a wholly discretionary trust, the trust agreement should include language that offers the trustee clarity and guidance concerning distributions for an addicted beneficiary. For example, a purely discretionary trust could include some of the following provisions:8
Drug testing procedures and suspension of discretionary distributions. The addicted beneficiary should be required to submit to a random drug test if requested by the trustee (or its designee). Further, the trust should give the trustee the power to suspend discretionary distributions to the beneficiary who has a positive test result for the presence of an illegal drug (and possibly alcohol) or a drug for which the beneficiary doesn’t have a prescription. The trust should give the trustee the authority to suspend discretionary distributions to any beneficiary who refuses to submit to a random drug test. While distributions to the addicted beneficiary are suspended, the trustee should be authorized to make payments directly to third parties on the beneficiary’s behalf, until such time as the trustee determines that the addict is in recovery. The trust should specifically provide that the trustee won’t be deemed to have breached its fiduciary duty if it decides either not to exercise its discretion to request a random drug test or only does so irregularly. The trust should give the trustee the express authority to use trust assets to defend itself in any legal action brought against the trustee involving the exercise (or non-exercise) of its discretion regarding the payment (or suspension) of discretionary distributions for an addicted beneficiary and for requiring (or failing to require) drug testing. The trust agreement should also contain an indemnity clause for the trustee to help protect the trustee from claims and costs that may arise in the administration of a wholly discretionary trust.
Recovery from addiction. The trust agreement should define “recovery” because it will likely have a different meaning for the settlor, the trustee and the addicted beneficiary. “Recovery” could be defined to be a minimum of “X” years of continuous sobriety (“X” being a number selected by the settlor) and determined to commence after the addict has successfully completed a treatment program. (The trustee could also be given the sole discretion to extend the time frame required to achieve recovery.) In addition, the trust could define “recovery” to require the addicted beneficiary’s continuing participation in therapy or support groups and to refrain from associating with individuals who may create an atmosphere conducive to drug and alcohol abuse.9 Last, the trust should provide that the trustee has the discretion to suspend payments if the addict stops attending the treatment program or participating in therapy.
Addiction advisors and authorization to engage professionals. To address a trustee’s potential concern over serving as trustee for an addict under a wholly discretionary trust, practitioners should consider naming an “addiction advisor” to provide directions to the trustee for matters pertaining to the beneficiary’s addiction.10 The addiction advisor could be a family member, friend or paid professional. The trust agreement should authorize the trustee to employ “addiction experts” to advise the trustee and the addiction advisor and to recommend and oversee treatment and recovery programs. Addiction experts should be broadly defined to include (but not limited to) physicians, counselors, probation officers and other professionals engaged to evaluate and treat the addict. Decisions made by the trustee concerning the suspension (or resumption) of discretionary distributions to or on behalf of an addicted beneficiary can be based on the directions of the addiction advisor (if one is named) or based on the recommendations of such addiction experts.
Definitions for alcohol and drug abuse and other additions. The trust should define what constitutes alcohol abuse, drug abuse and other addictions to provide clarity for the trustee and the addicted beneficiary. Definitions for alcohol and drug abuse and other addictions could be modeled after the criteria provided in the most recent edition of the Diagnostic and Statistical Manual of Mental Disorders.11
No-contest clauses. The trust document should include a no-contest clause, also known as an “in terrorem clause,” to dissuade the addicted beneficiary from challenging the trust. For example, if valid under the laws of the state having jurisdiction over the administration of the trust, the trust agreement could provide that any beneficiary who contests any of its provisions, or elects to take a statutory share of the settlor’s estate, will be deemed to have predeceased the settlor for purposes of the trust. The American College of Trust and Estate Counsel (ACTEC) has posted a summary tracking the state law treatment of no-contest (in terrorem) clauses on its public website.12
Addicted Beneficiary’s Duties
Consent to trust terms. After giving the addicted beneficiary the opportunity to review the trust, require him to sign a consent evidencing the beneficiary’s agreement to the trust terms. If the beneficiary refuses to sign the consent, the trust wouldn’t be funded for the beneficiary, and the assets would be distributed as otherwise directed in the trust.
Release of protected health care information. The trust document should require the addicted beneficiary to sign a consent authorizing the release of information to the trustee (or the trustee’s designee), waiving the privacy requirements of the Health Insurance Portability and Accountability Act of 199613 so that the trustee (or its designee) can receive drug test results, medical reports, information from treatment centers and addiction experts and all other relevant information pertaining to the beneficiary’s addiction. The trust should provide that an addicted beneficiary’s refusal to sign such a consent means the beneficiary isn’t in “recovery,” thereby triggering the suspension of trust distributions.
Trust Advisors and Trust Protectors
Because we’re unable to predict future events that may impact trust administration, especially when dealing with an addicted beneficiary, practitioners are increasingly incorporating the use of trust advisors and trust protectors.14 The trust advisor is usually given the power to advise the trustee regarding the administration of the trust. A trust protector is typically given the power to approve or disallow discretionary trust distributions and to amend the trust’s administrative provisions. Further, a trust protector may be given the power to appoint the assets of an existing trust to a new trust, which may have expanded provisions to deal with a beneficiary’s addiction. The trust document could also give the trust advisor, the trust protector or the trustee the authority to appoint an addiction advisor if one isn’t named initially to direct the trustee as to the exercise of its discretion regarding all matters pertaining to the beneficiary’s addiction.
Modification Options for Existing Trusts
Thus far, I’ve reviewed estate-planning options for trust beneficiaries who suffer from known addictions.15 What remedies are available when dealing with an existing irrevocable trust for a beneficiary who subsequently develops an addiction?
Uniform Trust Code (UTC). The UTC has been adopted in 31 states and the District of Columbia and offers some practical options for modifying existing trusts.16 The UTC contains two different modification provisions that may allow the amendment of an otherwise irrevocable trust for the benefit of an addicted beneficiary.
Modification by consent. UTC Section 411 provides that a “noncharitable irrevocable trust may be modified or terminated upon consent of the settlor and all beneficiaries, even if the modification or termination is inconsistent with a material purpose of the trust.”
Court modification. Perhaps more applicable to the modification of an irrevocable trust for an addicted beneficiary is UTC Section 412, which states that a “court may modify the administrative or dispositive terms of a trust or terminate the trust if, because of circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust. To the extent practicable, the modification must be made in accordance with the settlor’s probable intention.”
Decanting. Decanting is an act of transferring the assets of an existing trust to a new trust with provisions that are better suited to the current situation. In the case of an addicted beneficiary, the new trust could include the provisions suggested in this article. A few states have enacted the Uniform Trust Decanting Act, which permits decanting for appropriate purposes.17 Every state allows decanting in some form, but only some states have statutes governing decanting.18 ACTEC has included a summary of state decanting statutes on its public website.19 The various tax consequences associated with decanting are uncertain and involve complicated income, gift, estate and generation-skipping transfer tax considerations and risks, an analysis of which is beyond the scope of this article.
Peace of Mind
Few practitioners are trained to deal with the emotional turmoil that an addiction inflicts on a family. Yet, during the course of representing and advising our clients, it’s inevitable that we’ll be drawn into a family’s crises due to an addiction. We must be empathetic and provide candid counsel to our clients. There’s no perfect estate plan for a client whose beneficiary suffers from addiction, but by applying some of the strategies discussed in this article, practitioners can help craft an estate plan to promote recovery and future stability for the addicted beneficiary, and hopefully, some peace of mind for their clients.
Endnotes
1. www.cnn.com/2017/10/26/politics/national-health-emergency-national-disaster/index.html.
2. www.nytimes.com/2017/07/31/health/opioid-crisis-trump-commission.html.
3. STAT (also called Stat News) is a national publication produced by Boston Globe Media focused on producing daily news stories, investigative articles and narrative projects in addition to multimedia features about health, medicine and scientific discovery. Seewww.statnews.com/2017/06/27/opioid-deaths-forecast/.
4. Seewww.psychologytoday.com/basics/addiction/causes.
5. Roy A. Krall, “Estate Planning for Beneficiary Who is a Heroin Addict,” 25 No. 6 Ohio Prob. L.J. NL 7 (2015) citing David DiSalvo, “Why is Heroin Abuse Rising While Other Drug Abuse is Falling?” Forbes Magazine (Jan. 14, 2014).
6. See also Patricia Annino, “Does Your Client Have a Substance Abuse Problem?” AICPA Wealth Management Insider (Feb. 16, 2012) for a detailed discussion of substance abuse and its effects on families, a list of recommended questions to consider when designing estate plans for families dealing with substance abuse and a variety of estate-planning tools and options, some of which are also discussed in this article. Seewww.aicpastore.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2012/Wealth/ubstance_Abuse_Problem.jsp.
7. See Cynthia D. M. Brown, “Discretionary Distributions: A Trustee’s Guideline,” Commonwealth Trust Company (May 1, 2013), www.comtrst.com/discretionary-distributions-a-trustees-guideline, for an in-depth analysis of various discretionary trust distribution standards.
8. Recommended provisions are based, in part, on the suggested language in William F. Messinger and Samuel Dresser, “The Demise of Trustee Discretion and Ascertainable Standards as Effective Control on Dysfunctional and Underperforming Beneficiaries: Solutions for Trustees,” Appendix A, Suggested Language Restricting Access to Assets and Income When a Beneficiary or Family Member May Have Problems with Alcohol, Drug, Other Addictions, or Mental Health Concerns. Seewww.clereconsulting.com/wp-content/uploads/2015/02/WHITE_PAPER_Demise-of-Trustee-Discretion-1.pdf.
9. Krall, supra note 5.
10. See also Krall, ibid., for a discussion regarding the appointment and use of a “chemical dependency advisor.”
11. The Diagnostic and Statistical Manual of Mental Disorders (DSM) is the handbook used by health care professionals in the United States and much of the world as the authoritative guide to the diagnosis of mental disorders. DSM contains descriptions, symptoms and other criteria for diagnosing mental disorders. It provides a common language for clinicians to communicate about their patients and establishes consistent and reliable diagnoses that can be used in the research of mental disorders. It also provides a common language for researchers to study the criteria for potential future revisions and to aid in the development of medications and other interventions. Seewww.psychiatry.org/psychiatrists/practice/dsm/feedback-and-questions/frequently-asked-questions.
12. See T. Jack Challis and Howard M. Zaritsky, “State Laws: No Contest Clauses” (March 24, 2012), www.actec.org/resources/state-surveys.
13. Health Insurance Portability and Accountability Act of 1996, H.R. 3103, 104th Cong. (Aug. 21, 1996), www.govtrack.us/congress/bills/104/hr3103.
14. See Suzanne L. Shier and Tami Conetta, “Trust Protectors,” Northern Trust Insights On Wealth Planning (May 2016), www.northerntrust.com/documents/commentary/wealthplanning-insights/trust-protectors.pdf, for an expanded discussion of the use and powers of trust protectors.
15. See also Richard E. Barnes, “Repairing Broken Trusts and Other Fallen Estate Plans,” Estate Planning, Vol. 41, No. 11 (November 2014), at p. 3 for a more detailed discussion of modification options for existing irrevocable trusts.
16. Alabama, Arizona, Arkansas, District of Columbia, Florida, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Vermont, Virginia, West Virginia, Wisconsin and Wyoming have adopted the Uniform Trust Code. Illinois has introduced it into the legislature for adoption, HB 2526.
See The Uniform Law Commission (ULC, also known as the National Conference of Commissioners on Uniform State Laws), www.uniformlaws.org/LegislativeFactSheet.aspx?title=TrustCode.
17. Colorado, New Mexico, North Carolina, Virginia and Washington have adopted the Uniform Trust Decanting Act. Illinois (HB 2526) and Nevada (AB 197) have introduced it into the legislature for adoption. See “The Uniform Law Commission, Legislative Fact Sheet—Trust Decanting,” www.uniformlaws.org/LegislativeFactSheet.aspx?title=TrustDecanting.
18. See“The Uniform Law Commission, The Uniform Trust Decanting Act—A Summary,” www.uniformlaws.org/Act.aspx?title=Trust%20Decanting.
19. See Susan T. Bart, “Summaries of State Decanting Statutes” (Aug. 22, 2014), www.actec.org/resources/state-surveys.