How Does a HEMS Trust Standard Affect Trust Distributions?

HEMS is a common acronym used in estate planning. What does it mean? It has nothing to do with sewing. This is a different kind of hems!

Many trusts include a HEMS standard which is a tool that grantors have to direct how a trust’s assets are distributed. 

In the trust world, HEMS stands for health, education, maintenance, and support. It refers to an “ascertainable” standard found specifically in the tax code as guidance for an objective means of trust distribution. A properly administered trust according to the HEMS standard, avoids the trust being considered as belonging to the beneficiary for income tax purposes or included in their estate for estate tax purposes.

In the asset-protection world, HEMS is a standard for the use of trust funds in a manner that will not be considered as unfettered control (think ownership) of trust assets. In other words, if I’m a beneficiary running my own trust and I’m only using the funds for what can be objectively considered my health, for example, then I’m not considered to be able to pay it to myself for just “any old reason.” I don’t have a blank check. Blank checks are bad news for asset protection.

Maintenance and Support – the Sticky Wicket

Here, state law comes into play. It may help to define “maintenance” as the lifestyle to which the beneficiary is accustomed. Still somewhat ambiguous. Is it a present standard, past standard, or expected standard of living? Not sure. Hopefully the trust instrument helps, but the trustee’s reasonable discretion may be the final determinant.

The “support” standard is similar, but it is more specifically geared toward the provision of basic needs, or to help the beneficiary get ahead, as far as I can tell from case law.

HEMS Trust Distributions Examples

There are endless examples of what might be covered in this standard. Here’s a few: 

  • Medical treatments not covered by insurance
  • Education that will advance the employment opportunities of the beneficiary
  • Paying for financial and tax advice
  • Seed money to start a business where there’s a business plan that stands a reasonable chance of success.

The one thing we know that HEMS is not: spending money for no rhyme or reason. When trying to judge what is good for themselves, the beneficiary trustee will always be tempted to exceed a basic allowance intended to maintain a lifestyle.