For most people, the most difficult decision when creating an estate plan is how to distribute assets. Sometimes, however, the more difficult decision is what to do about a problematic beneficiary. For example, if you have a beneficiary who has a drug or alcohol addiction, should you gift them part of your estate or is that essentially throwing the assets away? To offer some guidance, we’ll explain how to protect the inheritance of a beneficiary with an addiction.
The Cost of Addiction
Drug addiction is a problem that knows no boundaries, striking the wealthy and the poor, the educated and uneducated, the famous and not so famous in equal proportions. If you have a child who is struggling with a drug or alcohol addiction, you are hardly alone. The Federal Reserve’s Report on the Well-Being of American Households in 2017 reveals that one in five Americans knows someone who is addicted to opioids or prescription painkillers – and that accounts for only one class of addiction. One of the realities of addiction is that addictions are typically not cheap. In fact, addicts often spend a considerable amount of their time trying to fund their addiction. Consequently, inheriting a large sum of money can do more harm than good for someone struggling with addiction. The story of banking heir Matthew Mellon illustrates all too well what can happen when an addict is handed a large sum of money.
A Cautionary Tale — The Story of Matthew Mellon
Mellon was an heir to one of the country’s biggest banking dynasties. His father committed suicide just before his high school graduation, which led to Matthew inheriting a total of $25 million from several trusts when he turned 21 years old. By then, Matthew had already been diagnosed with bipolar disorder and been through several rehab programs. For the next three decades, Matthew struggled with addiction, most recently to the prescription drug Oxycontin. At one point, Mellon said he was taking as many as 80 pills a day at a cost of $100,000 per month. Thanks to his inheritance, however, he could afford such an expensive addiction. Sadly, Mellon flew to Cancun, Mexico, purportedly to check into yet another rehab facility, but was found dead in his hotel room.
Protecting Your Child’s Inheritance
Watching your child struggle with an addiction is never easy. You still love them and disinheriting them does not sit well with you. Deciding how to handle that person within your estate plan is even more difficult. You may be reluctant to just gift them a large inheritance for fear it will be squandered on the addiction. At the same time, setting them up to squander their entire inheritance does not seem like a good idea. What can you do? The following tips may help:
- Be realistic and objective – step back and look at the situation realistically. Is gifting assets directly to the beneficiary in question too much of a risk? If the answer is “yes” then do not do it.
- Think about using a trust to protect the inheritance –pass down your child’s inheritance using a trust instead of handing down a large sum of money. A trust can protect the assets and even protect your child from his/her own self-destructive behavior.
- Choose your Trustee wisely – one of the biggest benefits of using a trust to pass down the inheritance is that a Trustee administers the trust. Choose your Trustee wisely as he/she may be responsible for discretionary decisions, such as whether to disburse trust assets to the beneficiary in question.
- Stagger distributions – only disburse small amounts at a time to the beneficiary. This could be a monthly “maintenance” amount or smaller amounts every few years.
- Use the trust terms to create conditions – here is where the benefits of a trust can really be seen. Using the trust terms you can create all kinds of conditions, if you choose to do so. You could require completion of a rehab program, monthly drug testing, or any other condition you wish to include as long as it is not something illegal or unconscionable.
Please download our FREE estate planning checklist. If you have additional questions or concerns about protecting the inheritance of a beneficiary with an addiction, contact us at the Northern California Center for Estate Planning & Elder Law by calling (916)-437-3500 or by filling out our online contact form.