Introduction
Many families today when planning their estates find themselves needing legal advice on how to address the reality that one of their intended beneficiaries, typically a child or grandchild under age 40, is addicted to opioids, alcohol, or a stimulant like cocaine or methamphetamine. Mental health issues, including depression, anxiety, bipolar disorder, or schizophrenia, may also be present.
Creating a trust to hold such a beneficiary’s inheritance is usually a given, but what type of trust would work best? A generic trust providing for “health, maintenance, and support” would not be suitable, since those terms will likely be interpreted to relieve the child from having to support themselves which will only enable their substance abuse to continue. Another type known as a supplemental needs trust may also not work, if its purpose would be limited to paying only for “extras” like recreation or entertainment, neither of which would benefit someone coping with addiction.
Recovery-Based Model. Specialists in addiction medicine state that the most effective kind of trust for a person with a substance use disorder is one that addresses their substance abuse head-on. First, it would authorize distributions only if the beneficiary is actively pursuing treatment and recovery. Second, it would limit distributions to paying only for the expenses incurred in carrying out the treatment plan that will have been developed for the beneficiary.
Taking this model as its focus, this article will present some planning ideas that parents and grandparents (who will sometimes be referred to as “settlors”) should consider when working with their attorney in designing a substance abuse trust for their child or grandchild, whether the trust will take effect during their lifetimes or upon the second of their deaths.
Acknowledgment: Much of the medical and psychiatric content of this Article was prepared with the input of Dr. Dale E. Panzer, M.D., of Gladwyne, Pennsylvania. I thank Dr. Panzer for his invaluable contributions to this article.
Table of Contents
■ Identify the Purpose of the Substance Abuse Trust
■ Coordinate Distributions with the Stages of Recovery
■ Designing the Standards for Distributions
■ Importance of Selecting the Right Trustee and a Trust Protector
■ Coordinate Trust Distributions with S.S.I., Medicaid, and S.S.D.I. Benefits
■ Identify the Purpose of the Substance Abuse Trust
Every trust should have a purpose, the more clearly stated the better, since it will inform all future parties, including a court if necessary, of the settlors’ motivation for creating the trust. One suggested purpose for a substance abuse trust might be “To avoid giving money outright to my child.” Another could be “To protect the funds from my grandchild’s creditors.” While these statements are fine as far as they go, they do not get to the heart of the substance abuse trust. Fundamentally, the beneficiary does not have a spending problem — they have an addiction problem — and it is their recovery that should be the focus of the trust.
Here is one parent’s expression of her reasons for establishing a substance abuse trust for her daughter, Sabrina:
Statement of My Purpose in Creating the Trust
My reason for creating this Trust comes from the fact that for the past several years my daughter, Sabrina, has been coping with an addiction to opioids that has seriously impaired her ability to engage in gainful activities or to responsibly manage money. I believe that Sabrina may also have an undiagnosed mental health problem that contributes to her addiction. While these conditions may continue indefinitely, I am committed to encouraging and empowering Sabrina to seek treatment in the hope that she will achieve as complete a recovery as possible. I want this Trust to provide for the continuation of my efforts in the event of my later incapacity or death.
■ Coordinate Distributions With the Stages of Recovery
If helping the child during recovery will be the focus of the trust, the settlors should start with an accurate understanding of how recovery works. First, substance use disorder is defined in the DSM-V-TR (Diagnostic and Statistical Manual of Mental Disorders) as compulsive or destructive behaviors involving alcohol, opioids, or stimulants, as well as possible mental health conditions. Addiction, according to a study by the American Society of Addiction Medicine, is a chronic disease involving impaired behavioral controls where the user compulsively abuses drugs, alcohol, or stimulants despite knowing their harmful consequences. The study continues:
Addiction is characterized by inability to consistently abstain, impairment in behavioral control, craving, diminished recognition of significant problems with one’s behaviors and interpersonal relationships, and a dysfunctional emotional response. Like other chronic diseases, addiction often involves cycles of relapse and remission. Without treatment or engagement in recovery activities, addiction is progressive and can result in disability or premature death.
American Society of Addiction Medicine, Public Policy Statement: Definition of Addiction, https://www.asam.org/docs/default-source/public-policy-statements/1definition_of_addiction_long_4-11.pdf?sfvrsn=a8f64512_4
From these definitions it is clear that a key element of substance abuse is behavior. Recovery thus should be focused on motivating the individual to acquire the skills and habits that will enable them to change the behaviors that lead them to abuse drugs, alcohol, or stimulants.
A highly regarded tool for mapping such changes is the Transtheoretical Model, which was developed by James Prochaska and Carlo DiClemente. It divides the process of behavioral change into different stages which, as adapted for a child with a substance use disorder, can be described as follows:
♦ Precontemplation Stage (Not Ready). The child denies the existence of their addiction, and is unmotivated and resistant to change. This may also be the stage that the child has regressed back to after several unsuccessful attempts at recovery.
♦ Contemplation Stage (Getting Ready). The child experiences feelings of ambivalence and conflicting emotions about their behavior. They may see the advantages of change, but are also aware of the negatives that changing their behavior may entail.
♦ Preparation Stage (Ready). The child has begun to experiment with changes in their behavior, and has arrived at a plan of action. They intend to take such action in the immediate future.
♦ Action Stage. The child has made specific, overt modifications to their behavior within the past six months that are sufficient to reduce the risks of their substance abuse.
♦ Maintenance Stage. In this stage the child has made the modifications to their behavior and is working to maintain them. In the Maintenance Stage the child is less tempted to relapse, and grows increasingly more confident that they can continue with their changes. (It should be noted that studies show that on average the Maintenance Stage lasts between six months and five years.)
♦ Relapse Stage. This stage, which is expected to occur one or more times, will be accompanied by feelings of disappointment, failure, and frustration. But learning from that failure, the child will experience a sense of progress as the time periods between each relapse become longer and longer.
For more information on the Transtheoretical Model, see Enhancing Motivation for Change in Substance Use Disorder Treatment, https://store.samhsa.gov/sites/default/files/d7/priv/tip35_final_508_compliant_-_02252020_0.pdf.
■ Designing the Standards for Distributions
■ Distributions Should Help Implement the Beneficiary’s Treatment Plan
The substance abuse trust bypasses the traditional approach to distributions, where a trustee is tasked with making distribution decisions by applying one or more broad standards such as “health,” “maintenance,” or “support” to the beneficiary’s needs at a given time.
Instead, the substance abuse trust will base distributions on the child being in recovery (i.e., in the Action Stage or Maintenance Stage) and actively engaged with a treatment team consisting of one or more individuals such as a care manager, psychotherapist, counselor, physician, psychiatrist, or nutritionist. The treatment team, with the child’s input, will develop a treatment plan that will identify both long-term goals and short-term objectives for the child to pursue. Examples of the specific steps that are found in treatment plans include:
■ Join a peer-support group composed of others who are also dealing with substance use disorder, and regularly attend its meetings.
■ Meet regularly with psychotherapists and clinicians who are trained in one of the current forms of behavior-modification therapy for substance use disorder.
■ Participate regularly in AA or NA meetings.
■ Pursue vocational training and, once employed, provide the trustee with proof of continued employment in a job suitable for the child’s skill level.
■ Submit to random blood and urine testing.
■ Avoid people and environments that are known to be triggers for the child’s relapse.
With this approach, the trustee will meet with the child and team members as needed to stay abreast of changes in the treatment plan, and to review the costs that will be incurred as a result. For example, paying for the child’s stay at a rehab facility may be indicated at the outset of the Action Stage. In the Maintenance Stage, the treatment plan’s objectives will likely have shifted to the child completing their education or a job-training program, which will generate expenses for tuition, books, perhaps a computer, and related items.
Before the trustee would commit the trust to paying for a proposed expense, they would first determine if the cost could be covered by a third party source, such as private health insurance or public assistance benefits. (The topic of the child’s eligibility for public assistance benefits is discussed more fully below.)
Although trust distributions will be based on the treatment plan, it is important to note that the trustee will always have final say over trust expenditures.
■ Who Will Pay for the Beneficiary’s Ordinary Living Expenses?
The trust’s focus on recovery-related expenses will mean that it will not pay for the child’s rent, groceries, or other ordinary living expenses if they are not part of the treatment plan. The settlors may well then ask: “Who will pay for them?” The simple answer is — the child, unless they are physically unable to work. As part of the recovery process, a young adult can be challenged to become self-supporting.
■ Dealing with Relapse
How should the trust address the possibility that the child will suffer a relapse at some point during their recovery? As mentioned above, it is common for relapses to occur one or more times during the recovery process.
NOTE: This fact should not be surprising. As anyone who has tried to quit even cigarettes can attest, maintaining one’s abstinence from an addictive substance is very difficult. Quitting is rarely successful on the first try; repeated attempts may be necessary before long-term abstinence is finally achieved.
Disincentive Clauses – Do They Work? Disincentive clauses, which will penalize the child if they revert back to using an addictive substance, have often been used in trusts for a beneficiary with an addiction problem. Penalties typically range from suspending, reducing, or even terminating the child’s interest in the trust. Whether such measures actually succeed long-term in preventing relapses is unproven, since there are no published studies on point. In any event, an approach more consistent with the goal of long-term recovery would be to treat a relapse as simply a “not unexpected” step along the way, with the trust to remain in effect and stand ready to pay for any help the child will need to recommit to the recovery process. Even if long-term abstinence remains unattainable, treatment goals can still focus on extending the periods of abstention incrementally over time.
■ What Is Trust’s Role If Child Is Not in Recovery?
If at a given time the child is at a pre-Action Stage and thus not involved in any treatment program, what role — if any — should a recovery-based trust play? Should all distributions be suspended until the child starts treatment, or may the trustee be allowed to make some kind of payments on their behalf? In the latter case, for what purposes can distributions be made — e.g., food, rent, a car, or simply a flat spending allowance? Does the risk that pre-Action Stage distributions might allow the child to continue using proscribed substances, thus delaying the day when they will be motivated to move to the Action Stage, affect the settlors’ decision?
This can be a difficult choice for parents and grandparents, which may be influenced by the extent to which they are currently supporting the child. Settlors may feel strongly that in all events the trust should serve as a safety net, so that the trustee should always have the ability to provide financial assistance to the child, at least in an emergency. To carry out this intent, a possible clause in the trust document could read:
Notwithstanding any other provision of this Trust Agreement to the contrary, the Trustee may distribute such amounts of the Trust Property and at such times as it in its complete discretion deems necessary to assist the Beneficiary in a crisis situation that threatens his health and safety.
■ Incentive-Based Distributions
In addition to the trust paying various third parties for the expenses incurred in carrying out the child’s treatment plan, the trust could also provide the child with the opportunity to earn non-cash rewards for their personal use and enjoyment if they meet certain recovery-based challenges. The challenges could come directly from the child’s treatment plan, e.g., to:
■ Remain steadily employed for a year,
■ Pass periodic tests for evidence of drug, alcohol or stimulant use, or
■ Have a perfect attendance record for a year at peer-support group meetings.
Examples of rewards that could be earned include vouchers redeemable at selected merchants for personal care goods and services, prepaid vacations, fitness club memberships, and the use (but not ownership) of a car. Note that no cash would be awarded, as discussed below.
Based on the principle known as contingency management, studies have shown that immediate rewards or “reinforcers” that are granted upon evidence of positive behavioral change, such as passing a drug test, can be effective as part of a long-term recovery plan. See S. Higgins, K. Silverman, and S. Heil, Contingency Management in Substance Abuse Treatment (2008).
Issues with Incentives
While incentives may seem salutary in theory, their implementation can prove problematic. For example, how practical will it be for the trustee to monitor the child’s efforts in completing an incentive-based challenge, such as refraining from drugs, alcohol, and stimulants for one year? Will the child be relied on to honestly self-report their results? How easy would it be for a clever beneficiary to alter blood and urine test results, or falsify employment or support group attendance records?
To avoid the risk of fraudulent reporting, the trust could provide that a challenge would be considered met only if the trustee is personally satisfied with the results, using whatever criteria — objective and subjective — they may choose. In this way, the trustee will not be forced to accept at face value any test results or other data that cannot be independently verified.
Cutting Out Cash
The reward for achieving an incentive should always be of a strictly non-monetary kind, since giving the child a lump-sum cash payment will create too great a risk of relapse. In fact, the trustee could be forbidden from distributing even tangible assets that could be readily sold for cash.
■ Importance of Selecting the Right Trustee and Trust Protector
■ Picking the Right Trustee
No matter how clearly the trust document may express the settlors’ wishes as to how the trust should operate, ultimately the substance abuse trust’s success will depend on the judgment and discretion of the trustee. Thus in addition to carefully selecting the distribution terms that will be included in the trust document, the settlors should be equally focused on appointing a trustee who will faithfully convert their wishes into action.
Choosing the right trustee for a substance abuse trust should begin with an understanding of the duties that such a trustee will be called on to perform. These duties fall into three categories, which are discussed below. The next step will be for the settlors to pick the individuals or institutional trustees who in their judgment are best qualified to perform those duties. Finally, the settlors should consider naming an additional person, known as a Trust Protector, to serve on their behalf in a supervisory role to ensure that the trust will be properly administered.
■ Three Kinds of Trustee Duties
A. Basic Duties of Every Trustee
There are several fiduciary duties that are imposed on all trustees, regardless of the type of trust involved. These include the duty to:
■ Administer the trust in good faith, and in accordance with its terms and purposes
■ Be loyal to the beneficiaries by acting solely in their interests
■ Invest the trust property prudently by considering the purposes, terms, distribution requirements, and other circumstances of the trust
■ Act impartially when there is more than one beneficiary
B. Special Duties of Trustee of Substance Abuse Trust
A substance abuse trust will impose special duties on the trustee, since they will be granted a large degree of discretion in determining the amount and timing of distributions. Even if distributions are to be based on the treatment plan as developed by the child’s treatment team, the trustee will still have the duty to make independent judgments as to whether the distributions are in the best interests of the child, and if the amounts being requested are reasonable. Even if distributions would be based on broad standards such as the child’s “best interests” or “welfare,” without reference to a treatment plan, the same criteria as to reasonableness will apply.
C. Duty to Coordinate and Prioritize Third Party Benefits
If the beneficiary may be eligible to receive benefits from third-party sources, including a government program such as S.S.I. or Medicaid, which are discussed below, or a private health insurance policy, a whole new set of duties will be imposed on the trustee. With public assistance benefits, trust distributions must be carefully monitored so that they will not duplicate or be substituted for available public assistance benefits. Likewise, in case of benefits possibly available from the family’s health insurance coverage, the trustee will have to ensure that such benefits will be the primary source for covering the beneficiary’s expenses, with the trust’s role limited to making up any deficits. It may be appropriate in this case for the trustee to hire a benefits specialist who has experience in negotiating health insurance claims with insurers.
■ Who Are Candidates to Serve as Trustee?
If the settlors themselves will not initially be acting as trustees, or in any event if they may later cease to serve for reasons of health, the next step will be to review the potential candidates and decide who will be best suited to discharge the above-described duties as trustee. There are two broad categories of trustees to choose from — individual trustees and institutional trustees.
■ Individual Trustee
Candidates here could include family members such as the beneficiary’s sibling, aunt or uncle, or a trusted family friend. The advantage of appointing an individual is that they should know the beneficiary well and will be able to provide a more personalized level of service than would an institutional trustee. By the same token, appointing a family member or friend as trustee will risk turning what may have been a caring and supportive relationship with the beneficiary into one filled with sharp conflict and anger, which typically occurs when the trustee has denied the beneficiary’s demands for money or other benefits that are not authorized by the trust. The beneficiary could be asked to sign an anti-harassment pledge in which they would agree to keep their contacts with the trustee within reasonable bounds, but there is no assurance that will be obeyed. Sometimes individual trustees will end up resigning out of sheer exhaustion.
■ Institutional Trustee
Appointing a trust company, bank trust department, or a brokerage firm’s corporate trust affiliate to serve as trustee will avoid any intra-family issues. However, having a financial institution serve as trustee for a beneficiary with a substance use disorder may create its own problems, particularly if the institution does not have trained personnel who can ensure that the trust will not needlessly make payments for items that are covered by private health insurance or a public assistance program, and who have the time and experience to work closely with the child’s treatment team — not to mention dealing with episodes of the child’s possibly unpredictable behavior.
■ Institutional Trustee Specializing in Special Needs Trusts
Perhaps the best type of institutional trustee for a substance abuse trust would be one that specializes in administering special needs trusts, which are typically created for children with intellectual or developmental disabilities. Depending on the trustee, they may have case managers and social workers on staff who can handle the medical and health care needs of beneficiaries with disabilities, and they may be willing to extend their services to work with a beneficiary with a substance use disorder. These special needs trustees will also be experienced in dealing with the S.S.I. and Medicaid eligibility rules. The ARC chapter in the settlors’ locale may be able to refer settlors to such a trustee in the area where the child resides.
■ Combining an Individual and Institutional Trustee as Co-Trustees
Rather than feeling stuck with an either/or choice on the selection of a trustee, an alternative would be to appoint both an individual and an institutional trust company to serve together as co-trustees. The individual trustee could focus on the beneficiary and their needs for trust distributions, while the institutional trustee would handle the investment of the trust property. However, both trustees would be equally involved in making distribution decisions.
■ Using a Trust Protector in Supervisory Role as Settlors’ Surrogate
If only one trustee will be serving, and particularly if that trustee will be a trust company with little experience in dealing with beneficiaries with a substance use disorder, the settlors should consider appointing an individual to act as Trust Protector. A Trust Protector is not the same as a co-trustee. Rather, the Trust Protector would act in a supervisory role as the settlors’ surrogate, with the authority to direct the actions of the trustee and others, thus allowing the trust to adapt to changing circumstances that may affect the beneficiary or the trust property, without the need to incur the expense and delay of seeking court approval to achieve the same results.
For example, under Pennsylvania law the Trust Protector could be given the power to direct that the trust be modified or terminated, or to remove the current trustee if their performance proves to be unsatisfactory, and to appoint one or more successor trustees. Additionally, the Trust Protector could direct the trustee’s actions concerning how the trust assets would be invested and could approve or veto any proposed disbursement from the trust. The trustee would be obligated to comply with the Trust Protector’s directions unless they would be manifestly contrary to the trust’s terms or amount to a breach of the Trust Protector’s duties.
Specifically as applied to a substance abuse trust, a Trust Protector could provide supervision and direction regarding the beneficiary’s eligibility for S.S.I. and Medicaid, and in coordinating trust distributions with the beneficiary’s treatment plan. Rather than counting on the trustee to appoint one or more agents for help in these matters, the Trust Protector as chosen by the settlors would be charged with actively monitoring the progress of the beneficiary’s recovery and, if necessary, directing the trustee to hire a treatment manager for the beneficiary or an advocate to secure SSI and Medicaid benefits.
■ Coordinating Trust Distributions with SSI, Medicaid, and SSDI Benefits
When designing a trust for a child with a substance use disorder, the settlors should anticipate that the child, if over 18, may at some point become eligible to receive public assistance benefits, particularly Supplemental Security Income (S.S.I.) and Medicaid, and possibly Social Security Disability Income (S.S.D.I.). It is important that the trust be drafted so that these public benefits, rather than trust assets, will have primary responsibility to pay for the child’s needs.
■Test for Disability
Eligibility for public assistance benefits will depend first on whether the child has a “disability,” which under the Social Security Act is defined as a serious, medically determinable physical or mental impairment that renders the child unable to engage in any substantial gainful activity. Moreover, the disability must have lasted, or be expected to last, for at least one year or to result in death.
This disability test may be difficult to meet for someone with a substance use disorder. First, a substance use disorder itself is not considered an impairment that can serve as the basis for a finding of disability. Second, even if the child has a separate mental health-based impairment that is recognized as a disability (e.g., bipolar disorder, major depression, or anxiety), the child’s eligibility will be denied if their substance abuse is found to be a material contributing factor to the impairment. The key question in this analysis will be whether the child would still be disabled if they stopped using drugs or alcohol.
EXAMPLES. David is unable to engage in any substantial gainful activity due to his diagnosis of chronic lupus (an autoimmune disease). He also happens to be addicted to cocaine. David’s ceasing to use cocaine will not improve the effects of his lupus, and so would not affect the determination of his disability. On the other hand Mark, who has a severe alcohol use disorder, has not been able to work due to his diagnosis of major depression and anxiety. If Mark would cease abusing alcohol, his depression and anxiety might improve to the point where he could engage in a substantial gainful activity. As a result, Mark may not meet the test for disability.
■ Limits on “Countable Resources”
In addition to passing the test for disability, S.S.I. and Medicaid eligibility will also require that the child not own “countable resources” having a dollar value in excess of $2,000. By contrast, benefits under the S.S.D.I. program are based on the person’s work history, without regard to their resources. “Countable resources” generally refers to cash and assets that can be converted to cash, but may also include a beneficial interest in a trust, depending on the trust’s terms.
■ The Trust as a Countable Asset
A trust funded with the assets of parents, grandparents, or other third parties, i.e., not the child’s own assets, will be treated as a countable resource if the trustee has a duty under the trust instrument to use the trust property to provide for the child’s support, and is not given the discretion to consider the availability of public assistance benefits that could be used for the same purpose. In that case, the trust will be treated as an available resource, and the trust assets will have to be spent down to $2,000 before public assistance benefits would be available.
Supplemental Needs Trust. To ensure that the trust assets will not be treated as a countable resource, the trust document must clearly state that trust distributions can be made only to supplement — but never to supplant — all the public assistance benefits that the child is eligible to receive. Such trusts are commonly referred to as Supplemental Needs Trusts. This language will make it clear that the settlors’ intent is that the public assistance benefits are to be treated as the primary source of providing for the child’s support, with the trust to be used only to provide those goods and services that are not covered by any public assistance program.
■ What Are the Benefits Provided by S.S.I.?
Three types of benefits are available with S.S.I. eligibility.
■ A monthly benefit that can be used to pay for the child’s support. For 2022, the monthly benefit for an individual is up to $841, or $1,261 for an eligible individual with an eligible spouse. (As of January 1, 2023, the monthly benefit for an individual will be $914, or $1,371 for an eligible individual with an eligible spouse.) In addition, most states provide a small monthly supplement (for example, $20) to this base amount.
■ In many states S.S.I. eligibility will automatically qualify the child to receive Medicaid, which will cover doctor visits, hospital expenses, and many other health care costs.
■ Beyond direct monetary assistance, eligibility for S.S.I. and Medicaid will also allow the child access to numerous community-based programs and services, such as food stamps under the SNAP program.
■ S.S.D.I. Benefits
S.S.D.I. pays a monthly benefit based on the applicant’s work history. As a result, most younger adults will not have enough work credits to qualify. However, an adult disabled child of a deceased parent who himself was receiving S.S.D.I. will be entitled to a survivor’s benefit if the child became disabled prior to age 22.
■ Income Considerations with Food and Shelter
If the child separately receives earned income, such as a part-time job, that will reduce the S.S.I. payments by 50 cents for each dollar earned. Unearned income, on the other hand, such as income distributions from a trust, will reduce the S.S.I. payment dollar-for-dollar. However, there is a special allowance for food or shelter provided directly to the child and paid for by a third party, including a trust. This type of unearned income will not cause a dollar-for-dollar reduction of the S.S.I. benefit; rather, the reduction will be limited to a maximum of one-third of the benefit, regardless of the actual value of the food and shelter being provided.
Based on these rules, when the child is receiving public assistance benefits, the trustee should generally avoid using trust money to provide food or groceries, rent or mortgage payments, or property taxes or utilities. However, the trust agreement should not specifically forbid the trustee from expending trust property for the child’s food and shelter, if the trustee would decide that it would be in the child’s best interests that the trust do so, even if it would result in a reduction in the child’s S.S.I. benefits.
Example. Simon, who is eligible for S.S.I., has just completed an in-patient drug treatment program and now needs a new place to live. He has found an apartment near to where he will be taking a full-time job training course, as well as where he will be attending frequent out-patient therapy sessions. The rent for the apartment will be $1,500 per month, which is obviously far more than his monthly S.S.I. benefit ($841 for 2022). Until Simon can find a job after finishing the training course, he will have no other income or assets to make up the difference. If the trustee would agree to have the trust pay Simon’s rent until he finishes the course, the $841 benefit would be reduced by $300 (one-third of the benefit, or $280, plus $20), leaving him with $541 per month to live on.
Based on these facts, the trustee could reasonably conclude that the advantages of this arrangement far outweigh the $300 monthly reduction, especially since Simon will continue to be eligible for S.S.I. and Medicaid benefits, including food stamps.