Addressing Substance Use Provisions in a Trust

Individuals fearing substance abuse by beneficiaries can include instructions aimed at blocking the potential misuse of funds.

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For many years, individuals leaving substantial wealth in a trust for their children, grandchildren, or other loved ones have included provisions in the trust instrument that attempt to deter a beneficiary’s use of potentially addictive substances. For some, one or more family members have already abused such substances, with adverse-to-disastrous consequences. For others, this inclusion is purely prophylactic. It has become common practice for attorneys to include such a paragraph as boilerplate.

The key to the success of these kinds of provisions having any beneficial effect on behavior is flexibility and tolerance. On the other hand, granting broad discretion to the trustee without proper context could result in fiduciary abuse of power. An example of a boilerplate provision would look as such:

“The trustee may choose to withhold distributions at any time and for as long as the trustee wishes if a beneficiary is suspected of using any substance the trustee thinks will cause or has caused harm. The trustee may conduct a personal interview, require substance testing, or use other means to verify the trustee’s suspicions. If a beneficiary won’t cooperate, the trustee may withhold distributions. The trustee may require any medical and therapeutic intervention or rehabilitation before distributions are reinstated. All related costs shall be paid from trust assets. No one may question the trustee’s decisions and the trustee is protected from any costs in defending decisions made in good faith.”

Drafters would benefit greatly by adding greater context so these provisions may be successful. Many trust beneficiaries are or become dependent on regular distributions for housing, utilities, insurance premiums, car payments and other essentials. To simply withhold distributions could result in heavy losses for the troubled beneficiary, including refused services, repossession, and eviction.

Rather than a generic right to withhold distributions, the trust may allow the trustee to pay for essential services and obligations directly from the trust. The trustee may still withhold beneficiary distributions that may be misused. In addition, the trust instrument may better communicate the settlor’s intent behind these provisions, whether they be moderate or severe.

In reality, there is little that anyone can do to intervene if the person suffering from harmful substance and alcohol use is not willing to accept help. However, if there are available friends or family members keeping an ongoing relationship with the beneficiary, the drafter should consider a mechanism for the appointment of one or more trust advisers who have a power to consult with the trustee in relation to the beneficiary’s distributions and a power to replace the trustee without cause. If you have specific questions, concerns, or would like to talk about creating a trust, click “Schedule an Appointment” and let’s discuss your specific circumstances.

This material was prepared by the FPA, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations:

1 - NAECP.org

2 - Kiplinger.com