Trust agreements often include provisions requiring a trustee to determine whether a party has substance abuse problems. Depending on the circumstances, these instructions can be general and included as boilerplate, or the analysis can be quite extensive and specific. When using a corporate trustee (CT), ensure that the trustee effectively can carry out the settlor’s intent.
Observing and supervising a beneficiary’s actual or perceived substance abuse is a challenging job for any trustee, but is especially arduous for a trust officer. In some situations, the beneficiary has a known dependence issue, and a fundamental purpose of the trust is for the trustee to try to protect the beneficiary from self-destructive actions. Determining whether a beneficiary is in the throes of addictions is very subjective and is often made by a trust officer who may have limited interaction with the beneficiary and a multitude of trust accounts in her book. Monitoring substance abuse presents further palpable challenges. The CT can face tension with and pushback from the beneficiary, especially if the trustee withholds distributions, orders counseling and medical intervention or takes other drastic measures. Conversely, the CT faces potential liability if it fails to take “appropriate” action when it suspects, or has actual notice or knowledge of, a substance abuse problem.
Should the settlor desire substance abuse provisions or sobriety clauses in the trust, it’s crucial to discuss these wishes with the CT team before the trust agreement is executed. Many trust companies routinely manage trusts with these provisions and serve for beneficiaries suffering from addiction and dependency problems. They can share valuable insights based on their experiences with similarly situated families, while realizing every family has a unique journey. Here are a few best practices to ensure that substance abuse provisions, or other “bad behavior” monitoring, in a trust agreement will have the best possible real world application.
Use a Trust Protector
A familiar option is to task a trust protector (TP) with making the triggering determination as defined in the trust agreement. A TP can be an individual or a committee of individuals, personally familiar with the beneficiary, and given broad and malleable powers under the trust agreement. As long as the TP has personal and intimate knowledge of the beneficiary, the TP can be tasked with making this subjective determination. For example, in the case of a beneficiary who doesn’t have a known substance abuse issue when the trust is created, a TP would be better situated to recognize changes in patterns of behavior of a beneficiary who begins abusing substances during the course of trust administration but is able to conceal such behavior during scheduled meetings with a trust officer.
When using a TP in conjunction with a CT, an attorney should proactively consider including some often overlooked housekeeping items in the trust agreement. First, the agreement should clarify the role and responsibility of the TP, including how they interact with the trustee and whether they serve in a fiduciary capacity. Second, the agreement should address resignation, removal and appointment of successor TPs. Commonly, an initial TP will be named, but the document will lack sufficient instructions if the named TP becomes unable to serve. Third, compensation provisions should be included to ensure transparency regarding the TP’s fee. The term “reasonable compensation” is frequently used, but consider more concrete guidelines such as “as agreed upon” by the party who engages the TP (typically the settlor) or an hourly rate if the TP is a paid professional such as an attorney or accountant. Finally, the settlor should consider shielding the TP from liability so a family member or trusted friend can serve with less fear of litigation.
Actual Knowledge or Notice Standard
CTs may have specific requirements relating to substance abuse monitoring. For example, a CT may prefer the trustee take action only on acquisition of actual knowledge or notice of substance abuse. Various state statutes already use this standard, and it will generally be difficult for a CT to take anticipatory action. Consequently, drafters should consider indicating that the trustee is under no duty to inquire into a beneficiary’s acts or conduct unless and until the trustee acquires that actual knowledge or notice.
Release and Indemnification
Some CTs may also request, as a condition of agreeing to the substance abuse provisions, that a certain standard of care or evidentiary burden of proof be applied and that action (or inaction) on the part of the trustee be protected with release and indemnification provisions. A trust company may also request release and indemnity language for liability that results from action (or inaction) taken at the instruction of a TP, as well as protection for and from the TP’s own actions (or inactions). Again, it makes sense for an attorney to partner with the CT to agree on language acceptable to the settlor and the trustee, so the trustee will accept the trust and administer it in a manner that best carries out the settlor’s intent.
*This article is an abbreviated version of “Drafting Trust Agreements With a Corporate Trustee in Mind,” which originally appeared in the June 2021 issue of Trusts & Estates.