Estate Planning Conundrum: What to do when a beneficiary has a substance abuse problem
Many parents have raised the issue of what to do when a child or grandchild struggles with substance abuse. With the recent death of Whitney Houston and her connection to substance abuse, it reminds me of what this means during the estate planning process. These parents are heartbroken and need guidance on how to address this difficult situation in their estate planning documents. Substance abuse – whether it’s alcohol, prescription drugs, or illegal narcotics – affects many of the families we advise. As a result, we developed a list of questions for families to consider when designing their estate plan:
I have noticed that substance abuse often masks other underlying mental health issues, including undiagnosed or untreated schizophrenia, bipolar disorder, and depression. That these issues are often part of a larger family pattern makes having the discussion much more difficult, but much more essential.
Families in Conflict An addicted child may have already taken a significant emotional, physical, and financial toll on the entire family. Parents who find it difficult to handle this child become increasingly disturbed when they consider who would step in if they are unable or unavailable. This helplessness often leads to anger, frustration, and conflict. One parent may want to cut off the beneficiary while the other parent cannot consider doing so. One parent may want to kick the child out of the home, while the other parent believes that doing so would make matters worse. These conflicts add stress to their marriage and the family at large. Grandparents may have different opinions than the parents. Siblings may already be resentful of their addicted sister or brother. In many families, the troubled child has already received significant emotional and financial assistance. His troubles have already taken centre stage at the dinner table. His presence in the home and attitude toward the family may have already created constant disruption. Estate Planning Tools and Options As complex and emotional as these issues are, families must address them. And they will welcome having an impartial, yet compassionate adviser to provide guidance, suggestions, and choices. One planning tool for parents to immediately consider is for that child to designate them as the agent under his health care proxy and his attorney in fact under the durable power of attorney. Without these documents, HIPPA will prohibit the parents from being involved with his treatment. Also, these documents give parents legal access to his health and financial records, which could be extremely important if it becomes necessary to apply for government benefits. Inevitably, an estate planning discussion will include disinheritance. In my experience, this is a subject frequently discussed and rarely implemented. No matter how angry and frustrated they are, parents still want to provide some sort of safety net for their child. This pressure to disinherit the troubled child may come from the sense that he has already taken more than his fair share of the family’s resources, possibly at the expense of the other, more responsible children. As the family’s adviser, however, you should ask the parents:
Establishing a Trust Rather than disinheriting him, a common solution is to establish a trust that includes him as a permissible beneficiary – or is only for his benefit during his lifetime. The hard decision, however, is who will serve as trustee after both parents die. Parents are understandably reluctant to place that burden on their other children or on other relatives. If there are significant assets, then choosing a corporate trustee is the simple choice. The other children or trusted friends or advisers can then have the right to remove or replace that trustee during the trust duration. If there are not sufficient assets to warrant a corporate trustee, then the parents must identify friends or trusted advisers – who should be paid for their services. The trustee should review the trust document to ensure that he has the right to resign from his office, and understand the mechanism for subsequent trustee appointments. The document should provide the trustee with the authority to expend funds for purposes such as counselling, detectives, drug testing, and private security. Trust
Terms and Provisions After deciding on the line of succession and identifying who will operate the trust, parents need to focus on the various purposes for which the trustee may or may not distribute income and/or principal from the trust to the beneficiary. If the beneficiary is likely to require government assistance, then the terms of the trust must contemplate that. The trust document may also give the trustee authority to withhold payments if deemed advisable. This is often preferable to asking that trustee to determine whether a beneficiary is drug-free. Those suffering from substance abuse can be clever, and making such a determination is tricky. Many parents have a sense of shame or denial, and may rightly choose not to make these troubles public, or put them in a trust document that others can access. I encourage parents to write an annual side letter to the trustee that describes their observations and offers details that they are reluctant to share while living. This letter could be placed in a sealed envelope, kept with the original estate planning documents, and updated/revised as circumstances change. It can be comforting to the trustee to understand more about the parents’ goals and objectives from their own voice. Planning for the beneficiary with a substance abuse issue is complex and can have consequences that affect the entire family. Remind parents that life is a movie, not a snapshot. A plan created now should be good enough to handle today’s circumstances, yet flexible enough to contemplate the unknown. Encourage parents who are dealing with this difficult situation to revisit their plan every few years as circumstances change and evolve.Read More
Weddings are wonderful and it is most certainly one of life’s main events and can be a complicated affair, just the planning of them causes couples to have some very serious conversation’s together and with both sides of the families.
Some issues often discussed:
Yet all these questions being relevant the most important question is often never discussed and is one really important question which should be talked about before a couple get married but often isn’t: the question of what happens when one of them dies.
Couples usually spend the pre-wedding period surfing on a wave of optimism and looking forward to a life of wedded bliss and of course marriage is about a new beginning.
Who wants to think about their future husband or wife dying and put the mockers on the whole day, and yet it is of the utmost importance to consider this question.
Sadly, for some couples a tragic event end the happy ever after take Kirsty Maxwell who fell from a 10th floor whilst on a friend’s hens party in Benidorm and who had just been married 7 months earlier a complete accident no one could have predicted.
Unfortunately, random events like this do sometimes occur early on in a marriage and when they do the remaining partner is left having to deal with a newly created joint estate. This is never a pleasant task but if couples have never discussed how they would like their assets to be distributed then it is infinitely more difficult and distressing.
As morbid as it may seem, if you are getting married, while you are planning your exciting future together you need to ensure that future includes a plan for what happens when one of you inevitably dies. Hopefully that will be far in the future after you’ve celebrated your golden wedding anniversary but none of us can ever know.
Getting married automatically invalidates any pre-existing wills and in the absence of a new will, an estate is subject to intestacy laws. It is possible for fiancés to make a will declaring that it is made in anticipation of an upcoming marriage and that it should not be invalidated once the marriage has taken place and you should consider doing this.
The residence nil rate band – do I qualify and should I change my Will?
A key promise in the Conservative Party’s manifesto prior to the last election was an increase in a married couples’ “nil rate band” (the amount they can ultimately pass to their children or others free of inheritance tax ) from £650,000 to £1 million. The Party had picked up on a growing disquiet that the nil rate band hadn’t kept up with house price increases which were pushing more and more families into the inheritance tax net. The standard nil rate band has been capped at £325,000 per person until 2021.
On the back of that promise, for deaths on or after 6 April 2017, the new, additional “Residence Nil Rate Band” (RNRB) will be available where the estate contains a family home (“a qualifying residence”) left to children or other “direct descendants” .
A maximum RNRB amount of £100,000 per person is available for deaths this year, increasing to £175,000 in 2020. If you double these figures for a married couple, the magic £1 million figure is reached by 2020.
A “qualifying residence” is any home that an individual lived in before they died (so buy-to-let properties, for example, are not included). If you own more than one residential property when you die, your personal representatives will need to nominate which property the relief should apply to.
At the end of the day, the property needs to end up in the hands of “direct descendants”. They are defined quite broadly in the legislation and include children (including adopted, foster and step-children), grandchildren, together with the spouses and civil partners of children and grandchildren. It does NOT include nieces and nephews, siblings or other relatives.
There are three main ways a property can be “inherited” by direct descendants. These are:
The main perceived difficulty arises when the property is left to a trust, for example a discretionary will trust. In these circumstances, the property will NOT be treated as having being inherited, even if the class of beneficiaries is made up entirely of direct descendants. It should however be possible to appoint the property out of the discretionary trust to direct descendants within two years of death, so that the RNRB can be captured. Where the direct descendant has an absolute entitlement to the property (for example, under a bare trust), the property will be treated as inherited.
For estates with a net value of £2m or more, the RNRB will taper away £1 for every £2 over £2m. Therefore currently, the RNRB will not be available for an individual estate over £2.2m. There may be cases where lifetime gifting is appropriate to ensure the estate is within the limits.
Where the family home has been sold (perhaps to move into a smaller, rented property or a retirement flat or nursing home) “downsizing relief” means that the RNRB can still be claimed. The calculations involved in downsizing relief are complicated, but the essence of the relief is that you can still clam the benefit of the RNRB where you disposed of a qualifying residence on or after 8 July 2015.
Where does this leave us now in terms of estate planning; should we all be changing our Wills to ensure that the RNRB is captured? The short answer is “no”. I have already mentioned that in the case of a discretionary trust, it should be possible to appoint the property out within two years to take advantage of the RNRB. A deed of variation within two years of death, if appropriate, will achieve the same result. In any event, if you have left the property under your Will to individuals who are NOT direct descendants, I doubt those wishes will have changed by reason of the introduction of the RNRB.
Specific provision can be made for the RNRB in the Will, if this gives the testator some peace of mind. One option would be to leave assets equivalent in value to the maximum available residence nil rate band on discretionary trusts, with an accompanying letter of wishes to trustees requesting that they exercise their powers to ensure that any qualifying residential interest is inherited by direct descendants to take advantage of the residence nil rate band.
While a change in inheritance tax reliefs might be a trigger to pull our Will out of the drawer, my guess is that most Wills should prove compliant with requirements for the relief unless, of course, there was never any intention of leaving the estate to children or other “direct descendants” anyway. Only, perhaps, where (rarely) the whole estate is left to a mixture of direct descendants and others, might some redrafting be necessary to ensure that the RNRB will apply to the qualifying part.
Please contact us for more information 01325324515Read More