How Estate Planning Can Help Families Coping With Addiction, Substance Abuse

An important component of building a comprehensive financial plan is determining how clients distribute their wealth at the time of their passing among their loved ones and preferred charitable causes.

Families are so often full of changing dynamics and relationships. When a loved one is dealing with substance misuse, it can increase the complexity of creating a successful estate plan.

Challenging conversations around addiction continue to emerge frequently among investors and, by extension, their beneficiaries. A report from Pew Research Center found that 46% of Americans have a family member or close friend who at some point has experienced substance use issues or has been diagnosed with substance use disorder.

It's not an easy topic to confront, and planning for it financially does not come with a straightforward playbook.

While navigating areas of sensitivity, I've experienced situations where a client's goals are broad and emotionally charged.

Some concerns may be that their assets pass to the next generation to be used in a way that enables destructive or addictive behavior, certain addictions may cause capacity issues that hinder their beneficiaries' ability to manage money appropriately, or an heir's susceptibility to undue influence by ill-intentioned individuals may spark privacy concerns.

The role of both the drafting attorney and financial planning professional is often to identify these concerns and then help narrow the focus of a client's goals to create a strong estate plan that properly weaves in beneficiaries who have substance use issues.

The inclusion, or exclusion, of certain provisions can help ensure whatever assets are left to loved ones are used to their benefit and not to their detriment. But family breakdown is a key fear for investors.

In response to a recent survey of wealthy investors conducted by Raymond James, 60% of respondents said that maintaining family harmony is extremely important when it comes to their intergenerational wealth transfer plan. Understandably, families want to tread carefully. (Survey respondents are investors with a minimum of $500,000 in investable assets.)

However, overly simplistic planning should be avoided when it comes to heirs who struggle with addiction, such as completely disinheriting a beneficiary because of addiction or leaving the responsibility to another sibling or relative with a "handshake deal" that this person will take care of the individual who is confronting those challenges.

No matter how well-intentioned a sibling or relative is, taking a reductive approach can create problems of its own.

An estate plan in its entirety can be seen as a collage of important documents. It consists of a financial power of attorney, healthcare power of attorney and the last will – which comprises the basic estate plan. For more complex estate plans, especially ones that include peripheral issues such as substance use and addiction, a trust is generally introduced.

Issues With Trusts

A trust can be a good vehicle for bequeathing assets that lead to positive outcomes for the beneficiary. For the grantor, choosing the right trustees to serve in a fiduciary capacity, ensure that assets are invested prudently and follow the terms of the trust is essential to success.

The trustees can be an individual qualified to serve based on state trust or probate laws, a corporate entity, or a combination of both where the individual serves as a form of "boots on the ground" for the corporate trustee communicating directly with the beneficiary.

Trust protectors can also be appointed as third parties with certain power over the trustees to ensure they are acting in the best interest of the beneficiary and following the provisions of the trust.

If a grantor has concerns about substance misuse by a particular beneficiary, they may choose to add provisions in the trust to combat those concerns. This is particularly useful in providing specific instructions when the trustee may not be as aware of or involved in the challenges the beneficiary is facing as the grantor is.

By adding provisions to the trust to address this concern, the grantor can provide specific guidance for distributions and take some of the burden of decision-making off the trustee.

For example, a grantor might empower the trustee with the authority to leverage trust assets to retain professionals in healthcare, therapy or other rehabilitation services to assist the beneficiary.

There may be a provision in case of a relapse that designates a period of sobriety before distributions can be made directly to the beneficiary, which includes the ability of the trustee to require ongoing testing and receive related treatment information. This can be a disincentivizing technique to discourage destructive behavior.

However, from a practitioner standpoint it could be argued that, if the trust is discretionary, the trustee already has sole discretion over income and/or principal distributions. If the trustee is presumably aware of and sensitive to the grantor's concerns, the trustee can exercise their right to withhold a distribution if necessary, and additional provisions may not be necessary.

Ultimately, financial advisors should work with attorneys and other professionals on their client's team to help address these complicated situations.

Playing Quarterback

The advisor is in a unique position to quarterback the process and provide guidance and recommendations, ensure the right documents are in place, facilitate family conversations and act as a sounding board for challenging decisions.

It's telling that of those who choose to work with an advisor, 84% have a documented plan (versus 66% who do not work with an advisor), 52% feel extremely prepared when it comes to their intergenerational wealth transfer plan (versus 37%), and 68% have tax-efficient strategies integrated into their estate plan (versus 50%), according to the Raymond James survey results.

No family is perfect. But perfection isn't a requirement of creating a successful wealth transfer plan. The Williams Group reports that poor trust and communication are the leading reasons for intergenerational wealth transfer failures (which account for 60% of wealth transfers).

Addressing serious challenges such as addiction among heirs requires well-measured and tailored planning that tactfully addresses substance use.

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Will Lucius is Chief Trust Officer at Raymond James Trust. He is also licensed to practice law in Florida, Michigan and Wisconsin, and before entering into fiduciary services, focused his practice on estate planning, elder law, trust administration and more.