Question: My brother passed away, and I am inheriting the proceeds from his life insurance policy. Am I responsible for paying off my brother’s debts? Should I use the money to help take care of my brother’s son, who has a substance abuse problem?
Loraine’s Answer: If you were the designated beneficiary of the life insurance policy and you are receiving those proceeds as an individual beneficiary, those funds are yours. You are not required to use them to pay his bills or to give any money to his children. I understand that you may wish to provide money, but you are not legally required to do so.
When you pay for things that you are not legally required to pay for, whether that takes the form of paying your brother’s debts, purchasing goods or services for his child’s benefit, or simply giving his child money directly, you are making gifts that can have gift tax consequences for you. I’m not saying that you should not make gifts; you simply shouldn’t make them blindly. Get some advice from an estate planning attorney who can help you minimize any taxes or other consequences if you give money to others.
I’ll address your question regarding your brother’s son who has a substance abuse problem in a little more detail: While it’s unlikely that you would be liable for any damages resulting from him buying substances, you likely don’t want to simply give him cash. He could end up using the money in ways that result in harm, either to him to or others. It may be better to help him, if you want to do so, by using the funds to provide him with help instead of giving him cash. For example, you could pay others for goods or services that he needs, if he’s willing to accept those. You could also create a trust for your nephew’s benefit that wouldn’t be directly accessible to him. If you do not want to be the one to monitor him and control the Trust’s funds, you could appoint a third-party Trustee for that purpose. Depending on the amount of funds available, you could consider a community pooled trust account, which is often a good option for smaller funds, or a full-blown trust run by a professional trust company. It might also be a good idea to have any such trust qualify as a supplemental needs trust (sometimes called a special needs trust), in case he qualifies for needs-tested disability benefits like Medicaid or Supplemental Security Income (“SSI”).
Key Estate Planning Takeaway: Consult an experienced estate planning attorney, preferably one who works with third-party supplemental needs trusts or special needs trusts. The attorney can help you figure out the best way to help your nephew with any funds that you want to offer him, so that you don’t end up helping him harm himself or others by simply handing him sums of cash.
This “Q&A with Loraine” blog series features answers from Morgan + DiSalvo Partner Loraine DiSalvo to questions posted on www.avvo.com. A key takeaway from each exchange highlights an important facet of estate planning.
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