Trust Money to a Beneficiary Under a HEMS Standard

If you want to give or leave assets in a trust, this will allay your concerns that money you leave in a trust will not be available when needed for the beneficiaries you wish to contribute. 

What is the HEMS Standard? 

Let's say you are a parent or grandparent and you want to leave an amount to your child, grandchild or great grandchild.  Let's say also that beneficiary is only 5 years old, so common sense says to leave that inheritance in a trust and let them get it when they are 25 or let them get it in thirds when they are 25, 30 and 35.  But then you think I don't want those funds locked up in a trust until the beneficiary is 25 or later because what if the beneficiary needs to use those funds to go to college?  It would be a disaster if the beneficiary wanted to go to college but the inheritance is "locked up in a trust" until they are older. 

Hence, the "HEMS" standard in trusts.  "HEMS" is an acronym for "health, education, maintenance and support" .  HEMS provisions are often put into trust instruments to provide the type of distributions a trustee can make to a beneficiary.  With HEMS provisions in that trust, once that trust is in place, even if that beneficiary is 10 years old, 16 years old or 22 years old, the trustee will have the ability to pay for the health care needs, tuition for schooling or even living expenses of the beneficiary prior to the date the trust terminates and the rest of the trust assets are turned over to the beneficiary.  

What is included? 

For purposes of the HEMS standard, what is the definition of the words "health, education, maintenance and support"?  Generally, health expenses are medical treatment, health insurance, eye and dental care, and prescription drugs. Education expenses include tuition for all levels of education, college housing and dining, career training and books, and study abroad.  Maintenance payments include mortgage payments or rent, taxes, insurance and reasonable comforts and customary vacations. 

Note that a beneficiary cannot require a trustee to make a distribution based on the HEMS standard.  Rather, the trustee has the discretion to make distributions to or for a beneficiary.  Both the selection of the trustee and communication to that trustee can be crucial to ensure that your intent in carried out regarding discretionary distributions. 

How do married people use HEMS?

The  HEMS standard is also used when a married person wants to provide for their spouse and beneficiaries.  For example, a married person can set up their plan so that when the married person passes away, their estate is left in trust for their surviving spouse.  The trust provisions can provide that the trustee may make distributions to that surviving spouse for HEMS.  The trust can further provide when the surviving spouse passes away, the remaining trust assets revert back to the beneficiaries of that married person who originally established the trust. 

While this is a common planning option for any married couple, it is particularly useful to those married who may have one or more children from a prior marriage or relationship.  If you are going to establish a trust for a beneficiary and provide that the trustee has discretion to make distributions to a beneficiary for their heath, education, maintenance and support, you may want to have communications now with that trustee so that you can communicate to that trustee how you would like them to exercise their discretion to make distributions to this common HEMS standard. 

Can you be too restrictive or not restrictive enough?

Know that some people get too restrictive with their trust documents.  For example, a grandparent may set up a trust for their grandchildren and say that the trust can only be used for paying for tuition only if the beneficiary is enrolled in an accredited university and the beneficiary maintains a 3.0 grade point average, and they pass a drug test every 3 months, and they have no criminal record and they are an all around nice person.  Then the trust will match any W-2 income the grandchild has.  This is too restrictive to put in the trust documents because that beneficiary who you set this up for may wind up being a valuable and contributing member of society making the world a better place but they won't qualify for any distributions because they did not fit any of the burdensome restrictions you thought were appropriate.  Rather, informally, in a separate writing or in conversations you have with that trustee you let them know the general guidelines you would like them to use their discretion to make distributions to that beneficiary under the HEMS standard. 

When it is not appropriate to leave the entire trust to one person, you wish to spread out the benefit over time or over several beneficiaries or there are young beneficiaries, you can provide that the trustee has the discretion to make payments for a beneficiary's health, education, maintenance and support.  

If you do this, carefully select the trustee who will have the discretion to make distribution under the HEMS standard and give that trustee guidance regarding how you want them to exercise their discretion.  

If you would like to discuss selection of trustee, your trust provisions or would like to consult regarding creating your own trust, please contact me at 307.200.1914.