leave an inheritance to the drug addicted beneficiary

leave an inheritance to the drug addicted beneficiary within a discretionary trust 

Dear Len & Rosie,

I have a sister who is a drug addict and is usually out of contact with us. My other sister and my stepbrother and I are the beneficiaries of my step-father’s living trust. Is there anything I can do ahead of time to ensure that we don’t have to find her when my step-father dies?

David

Dear David

When an ordinary revocable trust becomes irrevocable upon the deaths of the settlors  (the persons creating the trust), then the trustee is required to provide notice of the existence of the trust to certain persons, including all of the beneficiaries, other trustees, and the people who would inherit from the trust settlors had they died with no estate plan at all.

If your step-father created the trust on his own, presumably after your mother’s death, then you have nothing to worry about. Your sister, his stepdaughter, isn’t entitled to any notice regarding the existence of the trust unless she’s named as a beneficiary.

If your step-father’s trust was created by him and your mother, then your drug addicted sister is entitled to notice of the trust under California Probate Code section 16061.7. If you know where she resides, then the trustee’s attorney can mail the notice to her after it is signed by the trustee, with a cover letter explaining that she’s not entitled to anything. If she cannot be located after a diligent search, then that’s OK too. The trustee does not have to send the notice if your sister cannot be located.

Alternatively, it may be possible for your stepfather to revoke the trust he created with your mother, and transfer everything to a trust he creates for which your sister will not be entitled to notice.

It’s difficult to deal with a drug addicted loved one in an estate plan. Frequently, it does more harm than good to leave a substantial sum of money to someone suffering from an addiction. There are generally two ways of dealing with this challenge. The easiest way is to disinherit the drug addicted child, but that can be harsh.

An alternative would be to leave an inheritance to the drug addicted beneficiary within a discretionary trust in which the trustee has the absolute right to withhold most distributions unless the beneficiary passes a drug screening test. The trust would be there to pay for drug rehabilitation, but not the drugs themselves. The problem with this alternative is that the person serving as trustee becomes his brother or sister’s keeper. The trustee is the person who has to say no to the drug-addled demands of a suffering beneficiary.

That’s why many families take the easy way out by disinheriting the drug addicted child, leaving everything to the other children, and rely on a legally unenforceable handshake promise from the family to help out the drug addicted child when it’s appropriate.

Rosie

Don’t just drop a life insurance policy you no longer want.

don’t just drop a life insurance policy you no longer want. Instead, review the policy with an independent life insurance agent 

Dear Len & Rosie,

My father just passed away. He was 82-years-old and was not in good health, especially after my mother’s death. He had a $45,000 life insurance policy. When we were getting his affairs in order after his passing, we sent in the information to the insurance company to claim his life insurance. We found out that in September 2006 my father cashed out the policy for only $12,000. We cannot believe this.

There are five children. We think our father was taken advantage of due to his age, health and state of mind due to the passing of his wife. He had suffered a type of stroke that sometimes made him frustrated and frequently he could not remember what he was trying to say. We do not believe he cashed out the policy of his own accord. Is there a way to go back to the insurance company and argue that my father was not really capable of making this decision? Who would cash out a $45,000 insurance policy for only $12,000?

Kathleen

Dear Kathleen,

It’s more likely than not that your father’s $45,000 life insurance policy had a cash surrender value of only $12,000, which is why he received only that much when he turned his policy back in to the insurer. Whole life insurance policies are part insurance (the $45,000 face value), and part investment (the $12,000 cash surrender value).  The cash surrender value increases over time and eventually can exceed the face value of the policy.

As a rule, cashing in a life insurance policy is almost never a good idea, because you can frequently sell a policy to investors for more than its cash surrender value, or even trade in an old life insurance policy for a fully paid up policy in a tax-free exchange. We may never know why your father did it, unless the insurance company recorded his conversation with them for “quality control purposes”, which isn’t so likely.

What probably happened was that your father decided that he had bought this insurance to take care of your mother, and that he didn’t need to be paying additional policy premiums because she passed away before him. The insurer isn’t going to accept your explanation of your father’s mistake at face value.

If your father were in a conservatorship at the time he canceled the policy, then his action was and is legally void. Because he was not in a conservatorship, his action is legally voidable. However, to void the transaction, you would have to petition the court and prove that your father was, in September 2006, incapable of making his own decisions and protecting himself from undue influence.

This will be difficult to prove, especially if your father was living independently, driving, paying his own bills more or less on time, and otherwise getting through the day on his own. Unless he was clearly and severely incapable of doing anything to provide for himself, you will likely lose, and any money you spend on lawyers going after this insurance policy will be throwing good money after bad.

For the rest of you readers, don’t just drop a life insurance policy you no longer want. Instead, review the policy with an independent life insurance agent who isn’t wedded to a single insurance company to see if you can sell it for more money than you’d get if you surrender the policy, or even trade it in.

Len & Rosie