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The Opioid Crisis’ Impact on Wealth Planning

Estate planning options for dealing with an addict.

The growing epidemic of addiction is changing the landscape of our clients’ plans. Practitioners need to be prepared.

Addiction statistics are startling—approximately 142 Americans die every day from a drug overdose. Further, a forecast by STAT concluded that as many as 650,000 people will die over the next 10 years from opioid overdoses.

A multitude of issues associated with opioid and other addictions will cross our desks in the preparation and implementation of client 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. 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.” Practitioners must be able to effectively advise clients dealing with a family member suffering from addiction.

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. 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.

Estate Planning Options

Disinheritance. 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  not able 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.

The most common discretionary trust distribution standard is health, education, maintenance and support, or HEMS, as referenced in the Internal Revenue Code. 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. 

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. 

Addicted Beneficiary’s Duties

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.

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 1996 so that the trustee (or its designee) can receive drug test results, medical reports, information from treatment centers, 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. 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 the 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. 

Few practitioners are trained to deal with the emotional turmoil that an addiction inflicts on a family. Yet, during the course of advising our clients, it’s inevitable that we’ll be drawn into family 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.   

 

This is an adapted version of the author’s original article in the December issue of Trusts & Estates.

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