The Beneficiary with Substance Abuse – A Checklist

Take-Away: It is a challenge for the trustee of a discretionary trust to address the addictions of a trust beneficiary. Key provisions need to be included in the discretionary trust to assist the trustee charged to work with a trust beneficiary who is challenged with substance abuse or other addictions.

Background: Suppose a client comes to you with a proposed amendment to their revocable grantor trust. They ask you to review the instrument since Greenleaf Trust is named as the trust’s successor trustee. As you review the restated trust document you note that the client has opted to establish a fully discretionary trust, now authorized by the Michigan Trust Code [MCL 700.7103(d); MCL 700.7505], with specific provisions added where the successor trustee is directed to use trust assets and make distributions to deal with the client’s child’s substance abuse,  or the trust’s assets will be used to incent the child to change their behavior. Reading between the lines you conclude that one of the client’s children is a victim of the opioid epidemic that only now our country is beginning to confront. If the trust is set up as a ‘dynasty’  trust that is intended to continue for the child’s lifetime, the trustee is faced with a difficult task to identify that beneficiary’s addiction, to monitor the beneficiary’s progress in dealing with their addiction,  and to make distributions in a form or in a  manner that will lead to a recovery from that debilitating condition. As addictions are never really ‘cured’ only ‘controlled,’ the trustee faces a significant challenge in the years to come while the trust is administered.

Checklist of Trust Provisions: If a trustee is required to deal with a trust beneficiary’s substance abuse issues,  it will want to see several provisions in the trust instrument to assist the trustee to fulfill its broad responsibilities under the trust. Some of those desired trust provisions follow:

• Sole Discretion: Is the trust instrument a true discretionary trust as defined by the Michigan Trust Code, or are distribution standards imposed to constrain the trustee’s discretion, e.g. health, education, support and maintenance? If the trustee has sole and absolute discretion to make, or to suspend, distributions to or on behalf of the beneficiary, there will be less of a chance that that beneficiary will challenge the trustee’s decisions under the trusts. Health, education, support and maintenance, the origin of which is the federal tax code [Treas. Reg. 20.2041-1(c)(2)], are not formally defined, so a debate can always occur on what those limiting ‘standards’ on the trustee’s discretion actually mean or the scope of those restrictions on the exercise of the trustee’s discretion.
• Note Type of Addiction: Is the trust beneficiary’s addiction to alcohol or gambling, or does it entail illegal substances? A corporate trustee may be reluctant to serve and work with an addicted beneficiary when the addiction is to an illegal substance.
• Require Drug Tests: Even when a discretionary trust is used, there should be additional language in the trust that gives the trustee guidance when and how to make distributions. For example, the beneficiary should be required to submit to random drug tests if requested by the trustee (or a designee of the trustee.) Along the same lines, the trustee should be given the authority to suspend discretionary distributions if the beneficiary has a positive test result. Or, the trustee should be free to suspend any discretionary distributions if the beneficiary refuses to submit to a random drug test.
• Direct Payments Authorized: If discretionary distributions to the beneficiary are suspended, then the trustee should be authorized to make payments directly to third-parties on behalf of the beneficiary, perhaps until the trustee is satisfied that the beneficiary is prepared to cooperate, or the beneficiary provides some level of proof that he/she is on the ‘road to recovery.’
• Trustee Exoneration: The trust instrument should specifically provide, in addition to the sole and absolute discretion standard,  that the trustee will not be deemed to have breached its fiduciary duty if the trustee decides to either not exercise its discretion to require a random drug test, or it only requires periodic or irregular drug testing. Recall that the trustee has a duty of impartiality to both the current, afflicted, trust beneficiary and to the remainder trust beneficiaries who may not be particularly sensitive to the addictions of their predecessor beneficiary. Additionally, the trust instrument should expressly authorize the trustee to use trust assets to defend itself in any legal action brought against the trustee that involves the exercise (or non-exercise) of its discretion with regard to the payment or suspension of discretionary distributions to or for the beneficiary, and for its decision to require,  or its failure to require, drug testing by the beneficiary.
• Incentive Trusts: If the trust instrument is drafted in a manner to use trust assets or distributions from the trust to incent the trust beneficiary in his/her recovery from an addiction of which the settlor is aware, it is important that the instrument define what is meant by Is recovery defined as specific period of continuous sobriety, or a period of continued participation in therapy or support groups? Is recovery viewed from the perspective of the beneficiary no longer associating with individuals who the settlor believes tend to create an atmosphere that promotes or perpetuates substance abuse by the beneficiary? The trust instrument should also give the trustee full discretion to suspend distributions if the beneficiary ceases to attend treatment programs or to participate in therapy if those are conditions that the settlor imposes on distributions from the trust to or for their child.
• Hire an Addiction Advisor: The trustee should be authorized to hire an addiction advisor and use trust assets to pay for that advisor. The advisor can provide directions to the trustee with regard to specific addiction questions and the formulation of treatment plans to address the beneficiary’s addiction. Note: an addiction advisor is not the same thing as a trust protector. The trustee should be encouraged to pay for an advisor’s services from the trust estate in order to advise the trustee and make recommendations to the trustee with regard to the beneficiary’s treatment plans and recovery programs. The addiction advisors could be physicians, counsellors, probation officers, and any other individual with special skills necessary to enable the trustee (and probably the trust beneficiary) to understand and then treat the beneficiary’s addiction.
• Add Key Definitions: The trust instrument should define what constitutes alcohol abuse, substance abuse and any other addictions that the trust settlor is concerned about addressing so that both the trustee and the beneficiary  work with the same definition. Perhaps the trust instrument can use the definitions for addictions contained in the Diagnostic and Statistical Manual of Mental Disorders (DSM) regularly used by health care professionals as an objective and well understood definition of addictive behaviors as a starting point.
• Poison-Pill Clause: If the addicted beneficiary is treated differently from other beneficiaries, e.g. their siblings, under the trust instrument there is a pretty good chance that beneficiary will challenge the validity of the trust, claiming undue influence, lack of capacity, or any other standard claim that would cause the trust to be ignored so the beneficiary receives their intestate share of their deceased parent’s estate. In anticipation of a disgruntled beneficiary, there should be an in terrorem clause included in the trust instrument to deter such a challenge, including assigning all legal costs incurred by the trustee assigned to the beneficiary’s share (if the poison pill does not result in a complete disinheritance.)
• Beneficiary’s Consent: After his or her receipt and  review of the terms of the trust after the settlor’s death,  the beneficiary should be required to sign a consent that evidences that the beneficiary agrees to the terms of the trust instrument as written. If the beneficiary refuses to sign the consent form, i.e. it results in a conditional bequest to that beneficiary, then the trust should recite that the beneficiary will be treated as having predeceased the settlor, and thus the assets that would have been held in trust for that beneficiary (and used to address their addiction) will be diverted elsewhere. (Note: that  diversion provision may not be a big deterrent if the beneficiary’s descendants are the alternate ‘takers-in-default.’)
• HIPAA Release: As a condition to a trust share being set aside for the beneficiary the trust instrument should require that the beneficiary give to the trustee a written HIPAA release or consent that authorizes the release of the beneficiary’s protected health information to the trustee, or to the trustee’s designee, and in which the beneficiary waives his/her HIPAA privacy rights. The release should also cover the trustee’s right to receive drug test results, medical reports, and information from treatment centers and share those reports with addiction experts. Any time the beneficiary refuses to sign an updated (more current) HIPAA release the trustee should be authorized to suspend distributions to or on behalf of the beneficiary until a renewed HIPAA release is signed.
• Trust Protector: If the trust instrument includes the appointment of a trust protector, then it should also address what information the trust protector is entitled to receive with regard to the beneficiary’s health, addiction, recovery, etc. or whether the protector can appoint or remove an addiction advisor. If the trust protector’s authority is limited to modifying administrative provisions under the trust instrument then, perhaps, the issue of providing information to the protector with regard to the beneficiary and his/her addiction is not necessary. But if the protector’s authority extends to compelling distributions, or vetoing distributions, or the removal and replacement of the trustee which possesses the authority to suspend distributions or require periodic random drug tests, then the trust instrument needs to address the type and nature of information the trust protector is entitled to receive from the trustee, or any advisors, and how that information is transmitted with regard to the beneficiary’s condition, treatment and recovery. Access to this information may be critical if the trust protector is given the authority to remove the trustee only with cause.

Frankly many of these provisions are germane to trusts where there are no beneficiary addictive behaviors, such as when the beneficiary has mental health issues or diagnoses. The more we get away from estate planning as a means to avoid federal estate taxes,  and the more we look at estate planning trusts as mechanisms to transmit family values and the use of that accumulated wealth to meet the needs of children and grandchildren, the more thought needs to go into the specific needs and the long-term requirements of those beneficiaries and the tools that the trustee will have to use and pay for under the trust instrument to address those requirements.