In the world of estate planning, you may have encountered the acronym HEMS, which stands for “health, education, maintenance, or support.” This important standard is frequently included in trust agreements to help guide trustees on the types of distributions they can make to beneficiaries. By adhering to the HEMS standard, trustees ensure that any distributions align with these four categories. Failing to do so can lead to a host of negative consequences, including tax issues and loss of asset protection. Let’s explore why HEMS is such a valuable component of many trusts!
Why Use the HEMS Standard in Trusts?
1. Tax Benefits
One of the primary reasons the HEMS standard is commonly used in trusts is its tax implications. If a trust beneficiary is also the trustee, the HEMS standard helps prevent the trust’s assets from being included in the beneficiary’s gross estate for federal estate tax purposes. Similarly, if a trustmaker wants to transfer assets out of their taxable estate while still acting as a trustee, including the HEMS standard ensures that the trust’s property remains outside the trustmaker’s taxable estate. Essentially, the HEMS standard serves as a safe harbor rule recognized by the IRS, protecting the trust property from estate taxes upon the death of the beneficiary or trustmaker.
2. Asset Protection
Another crucial reason for incorporating the HEMS standard in trusts is the added layer of asset protection it offers. When combined with a spendthrift provision, the HEMS standard helps prevent a beneficiary’s creditors from accessing trust assets through lawsuits. By limiting distributions to specific purposes, trustmakers can create important protections for trust property.
For instance, if a beneficiary faces a lawsuit and creditors demand that trust property be used to settle a judgment, both the beneficiary and trustee can refuse such requests, as the trust’s terms do not allow for those types of distributions. This means that the trustee can confidently deny any payment requests to creditors, protecting the trust assets – even when the trustee is also the beneficiary.
Practical Application of HEMS
A common question among trustees is, “What exactly qualifies as a HEMS distribution?” Unfortunately, there’s no clear-cut definition of what fits within this standard, but this flexibility allows trustees to make decisions that truly serve the best interests of the beneficiary. Here are some examples of expenses that might be considered under the HEMS standard:
Health
- Eye care (glasses, contact lenses, surgery)
- Rehabilitation programs (substance abuse, mental health)
- Home healthcare and long-term care
- Gym memberships and exercise equipment
- Health insurance premiums
Education
- Tuition for schools and graduate programs
- Study-abroad programs and related travel
- Extracurricular activity expenses
- Childcare for dependents during classes
Maintenance and Support
- Rent or mortgage payments
- Living expenses for beneficiaries in charitable work
- Insurance premiums (life, auto, etc.)
- Family gifts for special occasions
It’s important to note that the examples provided are just a few possibilities under the HEMS standard. Trustees must exercise discretion and ensure their distributions reflect the intent of the trust while also demonstrating to potential plaintiffs, judges, and the IRS that the standard is genuinely being followed.
For instance, if a trustee provides a beneficiary with funds to buy an extravagant luxury vehicle when their usual mode of transport is much more modest, it could jeopardize the trust’s tax benefits and asset protection features.
Why HEMS Matters
The HEMS standard is widely used in drafting trusts for good reason. When implemented correctly, it can be a powerful tool to minimize unnecessary taxation as wealth transitions through generations, while also protecting trust assets from those who should not have access, such as creditors or divorcing spouses.
If you have questions about what qualifies as an appropriate distribution under the HEMS standard, please reach out to us. We have the experience and knowledge to guide you through these important decisions, ensuring your estate plan meets your goals and protects your legacy.
At Cheever Law, APC, we don’t just draft documents; we ensure you make informed and empowered decisions about life and death for yourself and the people you love, starting with a valuable and educational Life & Legacy Planning Session. This will allow you to get more financially organized and make the best choices for the people you love. If you have already completed your estate plan, we will review that plan at your Life & Legacy Planning Session to ensure that it will work the way you intend and address any holes or gaps that may be present if circumstances have changed since you executed your plan.
To learn more about our one-of-a-kind systems and services, contact us or schedule a no-obligation 15-minute introductory phone call today.