Balancing Support and Accountability

How high-net-worth families can protect their legacy while supporting their heirs.

Every parent dreams that our children will grow up to be happy, productive, contributing members of society. We envision a path that may include youth sports, music and the arts, faith and culture, and of course, education. Our fervent hope is that our efforts to provide the best possible resources to our children will result in highly functioning adults who love us and share our values of family and community. Still, despite the best parenting efforts, highly functioning adults don’t always happen.

Some children come into the world with special needs. Others experience developmental delays or challenges. Still others make it to teen or young adult years relatively unscathed only to experience mental or emotional difficulties, or perhaps even substance abuse, later in life. It is part of the human experience to go through struggles in life and family; financial status is not a guarantee of better outcomes. What is a family to do then, when planning for a multi-generational wealth transfer amid the specter of children (or grandchildren) who are currently incapable of being good stewards of wealth? How does a family plan around a child with severe emotional limitations or addictions?

Where there are obvious physical and developmental difficulties that will require lifetime care and consideration, estate planners frequently suggest “special needs” trusts designed to provide maximum flexibility to support the beneficiary as their needs change throughout life. Far more challenging, however, are situations where alcohol and drug addiction present ongoing issues.

Of course, a family member with substance abuse issues is disruptive on many levels. For parents or grandparents who are planning to transfer assets to younger generations, addiction presents an extra element of complexity. Even if there are not any current issues among family members, we hear from clients all the time that they want to protect their heirs from harm in the event addiction presents itself in the future. Finally, the addict may not be a direct descendent but the spouse or partner of one of our children.

It is well known that irrevocable trusts can be an effective tool in protecting assets from creditors. They are also effective in protecting beneficiaries from their own worst impulses. Since creditors cannot generally reach the assets of the trust, the beneficiary may not use the assets as collateral for a loan. The trustee usually has the power to make distributions on behalf of the beneficiary so funds may be made available for treatment centers and other rehabilitative services. If a family is concerned about the trustee having the power over distributions, they can name a special distribution trustee for this purpose. This allows for professional management and administration of the assets while placing a trusted family member or family friend in the position of making discretionary distribution
decisions.

An alternative (or additional) solution could be to make gifts of limited interests in family entities. For example, a limited partnership interest carries with it an ownership stake but typically no management interest nor the ability to compel distributions. Buy/sell agreements among the partners can help ensure that the ownership stays in the family.

When thinking about how to make funds available for the benefit of a family member with addiction issues, it is important to understand that treatment options are typically quite expensive and insurance may be limited, particularly for residential treatment facilities. Also, it is not unusual for an addict to cycle in and out of treatment and sobriety, requiring multiple stays. Sometimes families will hire a “sober living companion” to live with the individual, and take them to therapy and treatment appointments and even 12-step meetings, if those are part of the recovery plan. The people who provide this service are frequently in recovery themselves and have practical experience navigating different situations. Keep in mind that there is no certifying or accrediting agency to provide credentials for these companions so careful monitoring is appropriate.

The trustee with the power to make distributions for the benefit of the family member will need to take these factors into account when making decisions. It’s not an easy task and there is a high degree of uncertainty. This should be expected, so leniency and flexibility towards the decisions of the trustee should be built into the trust documents. Perhaps the most important job of the distribution trustee is to try and prevent additional harm by making direct distributions to a beneficiary who is under the influence or who is experiencing a particular episode of struggle.

These types of concerns arise in situations outside of clinical addiction. Sometimes it’s not substance abuse but some other kind of distress such as cults or psychologically abusive spouses and partners. In these scenarios, providing a trustee with the discretion to do what they think is in the best interests of the beneficiary is critical. Drafting a trust instrument with highly restrictive provisions, while tempting, may undermine the trustee’s ability to provide resources and care for the intended beneficiary.

These are not happy things to think about, and they certainly are not our minds as we spend sleepless nights with newborns and toddlers. Yet we all know the reality of the world we live in. Even if our own families are not facing these situations, we know of others who do. Careful planning and consideration of all the factors is an important part of safeguarding a family’s legacy for multiple generations.

At Whittier Trust, our experience in serving as a trustee and dealing firsthand with beneficiaries who are suffering from addiction and other behavioral issues has provided us with tremendous knowledge that informs how we advise clients in the planning stage. 

To learn more about how Whittier Trust can make a difference for you and your loved ones, start a conversation with a Whittier Trust advisor today by visiting our contact page.