Do you have a child who is addicted to drugs or alcohol? Do you struggle with the thought of what will happen to your child after you pass away? The last thing you want to do is to provide your drug addicted child with a blank check inheritance. This could lead to disastrous results, including a squandered inheritance or worse, you could unknowingly be contributing to your child’s unhealthy lifestyle. Fortunately, inheritance for children with substance abuse problems can be dealt with through thoughtful estate planning.
Disinherit the Child
While not the most appealing thought, parents are free to disinherit their children through specific instructions in their estate plans. Under some circumstances, this may be the safest route to save the child from his or her addiction. In Minnesota and Wisconsin, children have no right to a share of their parent’s estate if they are specifically excluded. Be advised, that if you do not prepare a will or other form of estate plan, your child will be entitled to a share of your estate under the Minnesota or Wisconsin intestacy statutes. If you decide to disinherit your child, you must leave specific instructions in your will or trust explicitly stating that such child was intentionally excluded. Disinheriting a child is often not an option a parent wants to consider. If that is the case, creating a trust can provide a more acceptable alternative.
Consider Creating a Trust
If you think it is unlikely that your child will recover from his addiction, but you still want to provide for him or her in your estate plan, consider leaving your estate in trust for the child’s benefit.
- Staggered Distributions: The terms of your trust can provide specific instruction as to how and when distributions are made. Distributions can be spread out over a period of years. For example, trusts can be written to distribute a quarter at age 25, a quarter at age 30, a quarter at age 35, and the remaining quarter at age 40. Such an arrangement may provide intelligent planning for a younger child with substance abuse problems who is thought to be going through growing pains.
- Incentive Trusts: Trusts can be drafted to prohibit distributions to problematic beneficiaries unless certain milestones are met; this type of trust is commonly referred to as an incentive trust. For example, a portion of the trust could distribute upon the receipt of a diploma for higher education, upon establishing a reliable record of continuous employment, upon the completion of drug or alcohol treatment, or consecutive clean results to random drug tests. If milestones/incentives are not met, the trust could provide for alternate distributions to charity or other remainder beneficiaries.
- Wholly Discretionary Trusts: For children with more severe addiction problems, it may be advisable to establish a wholly discretionary trust, whereby the trustee maintains sole discretion over distributions of trust income and principal. The appointed trustee will effectively assume the role of financial gatekeeper for the child, with full authority to determine how much or how little shall be distributed for the child’s welfare. A benefit of a wholly discretionary trust is that the beneficiary has no ability to force the trustee to make distributions. This provides a parent with extra assurance that there estate will not negatively contribute to their child’s addiction.
Trustee Selection
Regardless of how a trust is drafted, a key factor in establishing a trust for a child who struggles with addiction is selecting an appropriate trustee. The trustee will be tasked with managing and investing trust assets appropriately and making tough decisions with respect to distributions. Selecting a trustee to handle this job should not be taken lightly. A sibling or extended family member is often a poor choice, given the obvious conflict this can create in family relationships. By appointing a family member to act as trustee, there is potential for converting a loving and supportive relationship into something that could quickly turn bitter or adversarial. Another option is to appoint an independent person or corporate trustee (often a bank or trust company). While independent fiduciaries and corporate trustees charge a fee for their services (typically around one percent of the trust’s assets), in most cases, the benefit far outweighs the cost by avoiding the potential for family conflict. Furthermore, an independent or corporate trustee will have the added benefit of financial expertise and experience in handling distributions to beneficiaries suffering from addiction.
In some instances, protecting our loved ones requires protecting them from themselves. This can be accomplished through thoughtful estate planning.