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What Is HEMS and What Does it Mean for Trustees?

 By: Law Office of Gem McDowell, P.A April 1, 2020

Purpose and Benefits of HEMS

There are a few reasons for and benefits of HEMS.

For one, adhering to the “ascertainable standard” of HEMS can be vital for protecting the trust’s assets. For example, say a wife creates a testamentary trust that names her spouse both beneficiary and trustee upon her death. The trust may limit distributions of the assets to HEMS, which is an ascertainable standard recognized by the IRS. If the husband takes distributions that fall under one of these categories, the assets of the trust are not considered to be part of his personal estate – they belong to the trust, a separate entity – and are therefore protected from certain taxes. For this same reason, a creditor coming after the husband cannot access the trust’s assets to pay the husband’s debts.

Another benefit has to do with the trustee-beneficiary relationship, when it’s not the same person in both roles. It’s common for a beneficiary to want to draw more money from the trust while the trustee’s goal is to keep the trust as intact as possible. The HEMS standard serves to restrict the trustee from making distributions that can unnecessarily diminish the trust, while providing appropriate support for the beneficiary. By including this language in the trust, a grantor can prevent the beneficiary from having unlimited access to the trust’s assets.

Or, it can work the other way. Say that same couple from above has a trust that remains in the spouse’s control as trustee and beneficiary during his lifetime, and after his death passes to the couple’s children as beneficiaries. In this case, it’s the children who are motivated to ensure the trust remains as intact as possible. It’s in their best interest to ensure their father is adhering to the HEMS standard with the distributions he takes for himself as trustee and beneficiary.

Finally, the HEMS standard provides valuable guidance to trustees, whether they are also a beneficiary or not. By understanding what’s included under the umbrella of health, education, maintenance, and support, a trustee can better determine what distributions to make from the trust’s assets.

Examples of HEMS

Health, Education, Maintenance and Support are rather broad categories, but what do they include, exactly? The exact items included can vary by state, but here are examples of HEMS that are commonly included.

Examples of Health

Some basic examples in the Health category include:

  • Routine health care
  • Hospital care
  • Emergency medical treatment
  • Psychiatric or psychological care
  • Prescription drugs
  • Dental
  • Vision

The following may also be considered included in this category:

  • Elective procedures like LASIK or cosmetic surgery
  • Alternative medicine treatments
  • Gym, sports club, or spa memberships
  • Health supplements

Examples of Education

This category commonly includes:

  • Tuition for all levels of schooling from grammar to graduate, professional, or technical school or training
  • Continuing education expenses
  • Expenses for school-related programs, such as Study Abroad in college
  • Support during schooling years, even during summers and other breaks

Examples of Maintenance and Support

“Maintenance” and “support” are one and the same. Commonly included in this category:

  • Mortgage or rent payments
  • Property taxes
  • Premiums for health, life, and property insurance
  • Travel and vacation expenses
  • Charitable giving

This category is the least clearly defined. It’s typically interpreted to include distributions that help maintain the beneficiary’s standard of living. Distributions to cover expenses that are solely for the beneficiary’s happiness rather than support do not fall under this category.

For example, say our couple from above typically takes a two-week vacation to the Rockies each year. After the wife dies and her husband controls the trust, a distribution to cover this annual vacation would fall under this category. A distribution to cover a four-month, ‘round-the-world luxury cruise would not. That’s because such a vacation would be beyond his typical standard of living.

However, depending on the trust, the trustee may have some discretion to make distributions for just such an unusual vacation or other luxury that would be outside the beneficiary’s established standard of living.

Use of HEMS

Grantors can include general language regarding HEMS or they can be more prescriptive and precise about how they’d like the trust’s assets used. For instance, a grantor may specify that trust money can be used to pay for college but not for graduate school. Or that the beneficiary must use other sources of funds, if available, to pay property taxes or rent before accessing the trust’s money. The grantor has a large degree of control when directing how the trust’s funds can be used.

Read more related articles here:

What Is the HEMS Standard in Estate Planning?

The Princess Bride’s Guide to Discretionary Distribution Powers

Also, read one of our previous Blogs here:

The Role of a Successor Trustee After the Trust Creator Dies

Click here to check out our On Demand Video about Estate Planning.

Click here for a short informative video from our own Attorney Bill O’Leary.

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