Estate planning with a drug addicted child – a trust
- Explaining the common strategy of having your will appoint a trustee to manage the inheritance of a minor or young adult
- Noting the difficulty of using a trust to manage the inheritance of a drug addicted beneficiary
- Offering an alternative in the form of an annuity that can provide an equal monthly payment within a structure that the beneficiary cannot cash in or borrow against.
A significant financial windfall would benefit most of us. But for some, it would be a short-lived flash in the pan. For others, it could do more harm than good.
Advertising gives the illusion that we might enjoy a huge lottery win if we “play” the lottery. Sure, it could happen, but the likelihood is ridiculously small.
It’s much more likely for a significant financial windfall to come in the form of an inheritance.
I suspect that most of us would put such a windfall to very good use. Investment planning advice would be sought and the money used as advised to minimize or eliminate existing borrowing costs and to maximize investments.
Would our 16-year-old selves be so responsible?
What about when we were 19, 21, 25 or even 30?
The government looks after ensuring that a minor won’t fritter away an inheritance. Unless the will appoints a trustee, the office of the Public Guardian and Trustee (the “PG&T”) steps in and acts as trustee until the minor becomes an adult.
Wills regularly appoint a trustee for minors. Often, the trust extends beyond age 19, to one of those ages I previously referred to, i.e. 21, 25 or 30.
The will’s trust provisions typically direct the trustee to provide financial help for education and other important needs until they reach the chosen age and receive the balance of their inheritance. The beneficiary’s basic needs are met until they are hopefully mature enough to handle the financial windfall.
But what about an intended beneficiary who is unlikely to be responsible with a financial windfall at any age?
You want your hard-earned wealth to be responsibly handled. You also want your beneficiary’s life to be improved by it.
One heart-breaking situation where that dilemma arises is an adult child in the grip of drug addiction.
There’s a fear that any significant sum of money in their hands might just kill them.
A caring trustee who diligently monitors their condition like the parent would if alive might seem ideal. Someone with the expertise to manage an addict’s financial needs, approving funds for a treatment facility if the addict is ready for that while also being prepared to withdraw funding altogether at times.
Someone who could withstand all manner of pressure that an addict might exert.
But where would you find such a unicorn? Perhaps you could find a professional addictions expert willing to take this on, but professional trustees are very expensive and finding one with that particular expertise might be difficult.
Would you put that load on another family member? Might handing the purse strings of an addict’s inheritance to a family member be a recipe for disaster?
There is one alternative you might consider.
Imagine directing your executor to place that beneficiary’s inheritance into a locked down structure that will provide a fixed monthly payment.
You might want the payments to last until they die or to be for a fixed term. You might think it best for the payments to start right away after your death or be delayed.
To be effective, the structure would have to be iron clad, not only stopping the beneficiary from cashing it in, but also restricting them from selling or borrowing against it.
Such a structure exists. It’s called an annuity.
It’s important that your will be very clear about what type of annuity you want your executor to purchase for the beneficiary with their inheritance.
Annuities are sort of like mortgages: they are offered by a number of companies, each company offers different options and quotes can be obtained to maximize value. If you are interested in this option, I strongly recommend that you consult with an independent broker to learn about what annuity options are available.
Let me know if you would like help finding an independent broker.
Maybe you have seen the result of this or other estate planning mechanisms put in place for a drug addicted beneficiary. If so, I am interested in hearing from you about what that mechanism was and its effectiveness. I plan to share what I learn from you in a future column.
