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Jan. 14, 2019, 10:33 a.m. EST

How to leave money to a family member with an addiction

Protecting family finances while helping an embattled loved one

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By Angie O'Leary


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Opioid addiction has reached epidemic proportions. According to the Centers for Disease Control and Prevention, more than 42,000 people lost their lives due to opioid use in 2016, a fivefold increase from 1999. Fueled largely by the opioid crisis, drug overdoses now represent the leading cause of death for Americans under the age of 50.

The emotional and financial havoc addiction wreaks on families is staggering. Kids from stable, loving families become addicted and will go to great lengths to get money for drugs, even stealing from their parents or other family members. Many parents of chemically addicted children grapple with anger and guilt, and often spend thousands — even hundreds of thousands — of dollars on that child’s rehabilitation. Oftentimes it’s the money they had set aside for retirement.

Financial advisers, who have long worked with families to help them achieve their goals, often find themselves in the middle of these difficult situations, working with parents to put into place financial safeguards that protect not only family finances but also the well-being of the relative battling addiction.

Gaining control through estate planning

While abstinence and treatment are key to managing this issue on a macro level, many people will unfortunately end up in the clutches of addiction. The emotional fallout and financial turmoil wrought by addiction create ripple effects throughout families.

Though often viewed as a tool exclusively for the affluent, estate plans can support all types of families and can play a number of roles beyond the financial, such as providing guardianship of minor children and protecting vulnerable adults, including those struggling with addiction.

A thoughtfully designed estate plan can serve as a supportive resource if a family member’s addiction has put demands on your current financial resources and on those you have earmarked for carrying out your legacy after you’ve passed.

Increasing accountability through an incentive trust

Lump sum distributions or outright bequests to a vulnerable adult in the throes of addiction can prove fatal if that person uses the funds to continue purchasing harmful substances. Yet the opposite approach of simply writing a family member out of your will and withholding the support they need can be equally devastating.

Trust arrangements can help protect your assets and ensure accountability in how funds are distributed. Incentive trusts, in particular, can serve as solid compromises, as they are designed to encourage or discourage certain behaviors by using distributions of trust income or principal as an incentive.

In practical terms, this could mean that an adult beneficiary would collect distributions after meeting specified requirements, such as attending a treatment program or complying with routine drug tests. On the other hand, he or she might not receive distributions after failing to attend regular substance abuse counseling sessions.

Getting the details right

Incentive trusts fall within a specialized area of legal expertise, so working with an experienced attorney is crucial. A seasoned adviser can help you draft a document that is clear and definitive yet flexible enough to adapt to changing realities. It’s wise to anticipate and account for a number of scenarios regarding the recovery process, chemical use triggers and the possibility of relapse.

While incentivizing positive outcomes — for example, by adding provisions for random drug tests or employment requirements — your trust document should clearly spell out consequences for failure to adhere to the terms.

This is why you must be diligent in selecting the right trustee. The trustee is responsible for gauging adherence to the terms and making distributions from the trust, and he or she can be empowered with varying levels of discretion. This person must be willing, able and equipped to withhold distributions if the beneficiary does not meet the conditions.

Trusts of this nature often require the beneficiary to agree to specific terms and provide access to health records for administration. This can mean obtaining a Health Insurance Portability and Accountability Act (HIPAA) waiver to allow advisers and trustees access to health care records.

Creating the trust is an important first step, but funding it properly by retitling assets in the name of the trust assures its effectiveness. While an incentive trust is clearly a complex financial instrument, the safeguards it establishes can prove to be worth the effort.

Keeping the lines of communication open

Talking about finances can be touchy enough, but adding addiction to those conversations can be outright taboo. But talking about these issues openly can alleviate hard feelings and financial missteps. In order to make sure everyone is on the same page, it’s vital that your heirs fully understand your estate planning structure, the intent behind that structure and the physical location of key documents.

Supporting a family member who is struggling with chemical dependence is a daily challenge, but aligning support after you are gone is an important responsibility. In the face of addiction, having a thoughtful estate plan in place can provide peace of mind and added assurance that your heirs will be provided for.

Angie O’Leary is head of wealth planning for RBC Wealth Management - U.S.

Investment and insurance products offered through RBC Wealth Management are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, or guaranteed by, a bank or any bank affiliate, and are subject to investment risks, including possible loss of the principal amount invested.

RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in connection with your independent tax or legal adviser.

RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC

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