As you explore your options for estate planning, you might encounter the abbreviation HEMS, which stands for “health, education, maintenance, or support.” This term is frequently used in trust agreements as a shorthand for the kinds of payments trustees may make to a trust beneficiary. It’s also sometimes called a spendthrift clause.
A trustee must ensure that whatever they distribute to a beneficiary comes under one of the four categories when they are only allowed to use the HEMS distribution standard, also known as an ascertainable standard.
Failure to do so may have detrimental effects, such as tax repercussions and a loss of asset protection.
Why should trusts adopt the HEMS standard?
To file taxes
The HEMS standard prevents the value of the accounts and property in the trust from being included in the beneficiary’s gross estate for federal estate tax purposes. This is a key reason it’s frequently used in trusts if a trust beneficiary is also the trustee.
Similarly, if applied, the HEMS standard prevents the trust’s assets from being included in the taxable estate of the individual who established the trust to transfer assets out of their estate but also desires to serve as trustee to distribute funds to the other trust beneficiaries.
The HEMS standard is an Internal Revenue Service (IRS) safe harbor provision that can shield assets from estate taxes upon the passing of either the beneficiary or the trustmaker.
Using a HEMS distribution standard in trusts can prohibit a beneficiary’s creditors from receiving trust property by bringing legal action against the beneficiary when used in conjunction with a spendthrift clause.
Important asset protection elements were incorporated into the trust by the trustmaker by legally limiting the circumstances under which the trustee may distribute funds to the beneficiary.
For instance, if a beneficiary was the target of a lawsuit and the other side demanded that the trustee or beneficiary use trust assets to satisfy the judgment in the case, the beneficiary and trustee may both legitimately reject because the trust expressly forbids distributions for that reason.
To put it another way, a trustee would have difficulty attempting to include payments to a beneficiary’s creditors in the minimum permitted distributions for the beneficiary’s “health, education, maintenance, or support.”
The HEMS standard is a powerful instrument to stop lawsuit plaintiffs and creditors from accessing the trust property because the trustee has a fiduciary duty to the trust beneficiary and not to the beneficiary’s creditors. Even when the trustee and beneficiary are the same individuals, this usually holds true.
Real-life application of HEMS
When making trust distributions subject to the HEMS standard, trustees often wonder, “What exactly falls within the standard?”
Unfortunately, there isn’t a simple, black-and-white definition of what does and doesn’t fit. Even though this ambiguity is annoying, it gives a trustee considerable latitude to act in the beneficiary’s best interests.
Here are a few examples of the costs that the HEMS standards might cover.
- Routine medical checkups and exams and emergency medical care
- Eye care, glasses, contacts, and surgery for vision correction
- Insurance premiums for health, dental, and vision
- Long-term care or home health care costs
- Health-related home renovations, accessibility-related mobility services and products
- Alternative medical procedures (massage therapy, acupuncture, etc.)
- Mental health support, psychological therapies, retreats for mental health purposes
- Services for allergen cleaning
- Cosmetic procedures
- Drug and alcohol rehabilitation programs
- Exercise equipment or gym memberships
- Tuition for graduate or professional degrees at all levels of public or private colleges
- Study abroad initiatives and associated travel
- School-related costs, such as lodging, meals, books, computers, etc.
- Extracurricular activities and private tutoring
- Proms, class rings, announcements, robes, and graduation
- Uniforms and school supplies
- Professional training
- Daycare for dependents so a parent pursue education
Maintenance and Support
- Housing mortgage or lease payments
- Down payments for purchasing a home
- Home upkeep and repair
- Tax on real estate
- Support for a beneficiary involved in charity work or a low-wage job that serves the community
- Vehicles and their maintenance
- Charitable contributions
- Insurance premiums for auto insurance, disability, life, homeowner’s, etc.
- Family gift-giving for holidays, birthdays, weddings, baby showers, etc.
- Continuance of customary and recurring holidays
- Legal costs for maintaining family members
- Startup capital for a business
Remember that the above costs are just some categories that frequently qualify for justification under the HEMS standard.
When making distributions, a trustee must use discretion to show the IRS, judges, and possible litigation plaintiffs that the HEMS standard does, in fact, prohibit the beneficiary from having total control over the trust property.
A word of caution: the tax and asset protection benefits of the trust may be jeopardized by the trustee’s violation of its terms. For instance, if the trustee gives a beneficiary enough money to buy and drive a Lamborghini instead of their usual Toyota, or to take a yearly six-month vacation to Tahiti instead of their family’s customary one week at Disneyland.
Get guidance on HEMS
The HEMS standard is frequently employed when creating trusts, and for good reason. When used appropriately, it can be a potent and effective tool for lowering the likelihood of needless taxation when money is passed down the family line.
It can also serve as a safeguard against those who shouldn’t have access to trust property, like creditors, future ex-spouses, and predators.