For many years, parents leaving substantial wealth in trust for their children and grandchildren 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. Here is an overly simplified example of a provision to deter harm from substance use (I have left out conventional legalese and used plain language instead):
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.
Another simplified example of a trust provision
You should note that this provision does not require that all distributions be stopped, or even that any be delayed, when suspicion of substance use exists. It also does not use terms like “abuse,” “addiction,” “drugs” or “alcohol.” Before I explain, below is another simplified example of a provision that is intended to protect trust funds from all kinds of potential misuse:
The trustee may choose to withhold distributions to a beneficiary at any time and for as long as the trustee wishes if the trustee suspects that a beneficiary is getting divorced, has a case in court, is ill or incapacitated, is seeking bankruptcy protection, is insolvent, has lost or settled a lawsuit, is facing any other adverse financial circumstances; or the trustee suspects that a distribution to the beneficiary may be diverted under a claim by a spouse, a creditor or any other person; or the trustee suspects that the beneficiary may be unable to manage the distribution for any other reason. 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.
Why context matters
Versions of these two provisions are often both included in a trust as boilerplate rather than directed at any particular beneficiary. The language actually used in trust instruments is fairly complicated, sometimes obfuscates the plain language and often tempers the depth of the raw power given to the trustee to withhold benefits. The good news, or bad news, is that most professional trustees simply won’t implement these kinds of provisions absent a clear need to protect a beneficiary from severe harm and death.
I propose that drafters add 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.
Alternatively, 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.
Here is a moderate example:
The purpose of this provision is to protect a beneficiary who is experiencing diminished capacity, has committed criminal acts, including stealing from friends and relatives, or is obviously underemployed and the trustee suspects that the causes include harmful alcohol and substance use. I prefer that the trustee consider requiring direct payment to the vendor for any beneficiary’s costs, expenses, and obligations as a first resort, and withhold most or all distributions to the beneficiary, to encourage the beneficiary to seek help. However, the trustee may 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. I encourage, but do not require, that the trustee conduct a personal interview, require substance testing, or use other means to verify the trustee’s suspicions of harmful substance use. The trustee may require any reasonable 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.
Here is a more severe example for a known substance user:
The purpose of this provision is to protect Thomas, who has experienced diminished capacity, committed criminal acts, including stealing from friends and relatives, and is chronically underemployed, due to long-term harmful substance and alcohol use. The trustee shall only make direct payments to the vendors for Thomas’ costs, expenses, and obligations and shall withhold most or all distributions to Thomas. Thomas is required to not use any substances, including medically necessary prescriptions, not approved by the trustee in advance, keep all his rehabilitative therapy appointments, avoid relations with known substance users, and submit to monthly testing for substance use. The trustee is directed to withhold all distributions to Thomas, and may stop paying all Thomas’ costs, including, but not limited to, housing, utilities, and household goods, at any time the trustee finds that Thomas has failed the foregoing requirements. I encourage, but do not require, that the trustee conduct a personal interview, demand a substance medical screening, or use other means to verify the trustee’s suspicions of harmful substance use. The trustee may require any reasonable 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.
A role for trust advisers
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.
Timothy Barrett is a Senior Vice President and Trust Counsel with Argent Trust Company. Timothy is a graduate of the Louis D. Brandeis School of Law, past Officer of the Metro Louisville Estate Planning Council and the Estate Planning Council of Southern Indiana, Member of the Louisville, Kentucky, and Indiana Bar Associations, and the University of Kentucky Estate Planning Institute Committee.
Six Steps to Take if You've Recently Inherited Money From a Loved One
It’s important to deal with the emotional aspect first before tackling the financial one.
By Kiplinger Advisor Collective Published
Alaska Airlines to Buy Hawaiian: Get Bonus Miles Now
How to use the Alaska Airlines credit card and frequent flyer program to save on trips to Hawaii, Alaska and beyond.
By Ellen Kennedy Published
11 Reasons to Consider a 1031 Exchange
Deferring capital gains taxes might be at the top of the list, but growing your portfolio and your wealth and helping with estate planning are also compelling reasons.
By Daniel Goodwin Published
Why It’s Time to Give Bonds Another Look
Yields are much more attractive now, but you should use discretion to find the bond allocation that’s best for you.
By Bill Aldrich, CLU® Published
Estate Planning and the Legal Quirks of Retiree Cohabitation
Creating an estate plan for an unmarried couple is already challenging, but when the cohabitating couple are in their golden years, it’s especially tricky.
By David Handler, J.D. Published
Seven Financial Planning Stops to Put on Your Map to Financial Security
Creating a comprehensive plan is just the start, though. Checking in regularly to make sure you’re still on track is imperative.
By Michael E. Lewis II, CFP®, CLU®, ChFC® Published
How to Measure the Health of Your Retirement Plan
These five key indicators can help you make decisions based on the overall performance of your retirement plan rather than individual variables.
By Brian Skrobonja, Chartered Financial Consultant (ChFC®) Published
Four Easy Ways to Get Yourself Fired
Being a standout on the job can sometimes be as simple as showing up to meetings on time, responding promptly to requests, doing your homework and not being a jerk.
By H. Dennis Beaver, Esq. Published
How Might the Great Wealth Transfer Change Society?
As $84 trillion in assets move from Baby Boomers to younger generations, we could see a greater emphasis on financial technology and investing based on values.
By Jennifer Wines, JD, CPWA® Published
Why More Retirees Might Come Out of Retirement
It’s often not solely because of financial reasons, but because of a lack of purpose in retirement. This financial expert can relate.
By Chris Blunt Published