This Blog was written by: Alicia Godin, Estate and Trust Consultant, Scotiatrust
I recently had the opportunity to participate in the estate planning process for two sets of clients facing similar challenges. Both clients are in their mid to late 60’s, and they each have two children. It was their intention to leave their respective estates to each of their children, in a fair and equal manner. Previous blog posts have alluded to the use of the word “fair”, as fair does not necessarily mean equal, or the same, and these particular client scenarios were evidence of this.
Each of the clients had one child that they would describe as average, and financially, emotionally and physically independent and they had no concerns with leaving any future inheritance to this child. The second child in each family however, had experienced substance use and abuse challenges. For one family, that child had not acknowledged their illness, and had no desire to seek treatment or recovery. For the second family, the child had been living with but actively managing their addiction. In both situations, the clients were concerned that an influx of wealth coupled with the emotional effect of the loss of a parent, would pose a significant risk to the health and well-being of the child, and potentially devastating effect on their recovery.
As a result, we discussed utilizing a trust structure in order to ensure that the beneficiaries would have access to the inheritance, while taking into account their specific needs. Trusts for minor beneficiaries, or beneficiaries receiving government disability benefits, are fairly typical, routine solutions which are drafted in a fairly standard and consistent manner. However, a trust for a beneficiary living with substance abuse and/or addictions challenges should be designed to meet their specific needs.
Every trust should have a purpose, and the more clearly stated the purpose, the easier it will be for the trustee to honour the spirit and intent of the testator (or settlor, in the case of an inter vivos trust). A trust can be structured as a “passive” or “active” trust; typically distributions from a passive trust are prescribed, and the trustee may have little discretion over the type and value of distributions. An active trust on the other hand, could designate that the trustee play a more active role in administering the use and distribution of trust assets – such as being directed to work proactively with healthcare providers or paying costs associated with recovery.
The clients had two primary concerns regarding distributions from the trusts; first, should distributions be made in cash, and secondly, could distributions be contingent on the beneficiary establishing their sobriety. Indeed these concerns reflect some common features of trust documents that expressly address substance abuse and addiction:
- Evidence of the existence of dependence or addiction –a trustee can be given discretion to determine whether the beneficiary’s substance abuse has had detrimental consequences, and to define what conduct constitutes substance abuse.
- Requirement of testing – often trustees may request or require the beneficiary to undergo testing to qualify for distributions.
- Suspension of discretionary and mandatory distributions – in the event of a relapse, or refusal to provide adequate evidence of recovery/sobriety, the trustee may be directed or authorized to withhold distributions to the beneficiary. Including such directives can be critical in the effectiveness of the trust structure.Additionally, with respect to the type of distributions at any given time, there could be a concern that distributions of cash would great too great of a risk of relapse, and as such, the trust could direct that the trustee make distributions in an alternate format, such as in the form of paid vacations, memberships, the use of a car or personal services.
- Treatment – trustees can be given the authority to receive input from health care and treatment providers, and to assess whether a beneficiary is abiding by treatment plans that may be in place.
While it is important to clearly outline the parameters of the trust, and articulate the parent’s directions, ultimately, the success of the trust will depend largely on the trustee. Provisions usually require the trustee, a fiduciary, to make a number of difficult determinations that may fall outside their area of expertise. As a result, parents, testators (and settlors), should be equally focused on selecting a trustee with the experience and ability to best carry out their intentions.