What is the HEMS Standard (Health Education Maintenance & Support)?
The HEMS standard for trustees, which stands for "Health, Education, Maintenance, and Support," is a guideline used to instruct trustees on how they can distribute trust funds to beneficiaries. It is commonly found in irrevocable trusts and is designed to provide trustees with clear, yet flexible, instructions on what constitutes permissible expenses. Here's a breakdown of each HEMS component, along with examples:
HEMS - Health Education Maintenance and Support
- Health: This includes medical expenses, health insurance premiums, dental care, premium hearing aids (beyond what health insurance would cover) therapy, and other health-related costs. For example, a trustee could use trust funds to pay for a beneficiary’s surgery, long-term care, or prescription medications. It could also pay for healthcare supplements, mobility services, high-end durable medical equipment and mental health counseling.
- Education: This covers expenses related to formal and informal education, such as tuition, school fees, tutoring, books, supplies, and even living expenses while attending school. For instance, if a beneficiary is attending college or graduate school, the trustee could pay for their tuition, meal plans, textbooks, on or off campus living accommodations, extra-curricular activity expenses or the cost for studying abroad.
- Maintenance: This term refers to the general standard of living that the beneficiary is accustomed to. It can include a trustee paying for housing costs (mortgage, rent, home repairs, insurance premiums, property taxes), utilities, internet bill, groceries, purchasing a car or other transportation and auto maintenance and insurance costs. A trustee might also use trust funds to cover the beneficiary’s car payments or repair costs and other expenses to maintain the beneficiary's lifestyle.
- Support: This is a broader term that includes financial assistance to meet the general needs of the beneficiary, similar to maintenance. Support could encompass childcare costs, clothing, home repairs, and even typical/periodic vacations if deemed necessary for the beneficiary’s well-being.
For example, a trustee might decide to distribute funds for a beneficiary’s rehabilitation program (health), pay for their graduate school (education), contribute to their mortgage payments (maintenance), or help cover expenses related to raising children (support).
HEMS is also referred to as an "ascertainable standard"
The HEMS ascertainable standard helps ensure that the trustee makes distributions that are in the beneficiary's best interest while maintaining a level of protection over the trust assets. HEMS also provides trustees with much-needed guidance, which is always appreciated and can help prevent reckless spending.
The HEMS standard should be used to keep the beneficiary in his or her accustomed standard of living – similar to prior spending patterns. HEMS is not designed to allow a trustee to significantly elevate a beneficiary’s standard of living or to pay for “anything and everything” the beneficiary wants - if that were the case then there would be no standard of distribution which can cause other problems which are discussed below.
So, if the beneficiary typically drives a Buick, it would likely be inappropriate for the trustee to purchase a Maserati for the beneficiary. Similarly, if the beneficiary usually takes a week-long vacation to either Univeral Studios or Disney World in Orlando, it would be potentially problematic if the trustee started paying for ultra luxury six-week European cruises.
However, per Treasury Regulations Section 20.2041-1, “In determining whether a power is limited by an ascertainable standard, it is immaterial whether the beneficiary is required to exhaust his other income before the power can be exercised.” In other words, a trust restricted by a HEMS standard does not require the beneficiary to use his or her own assets before the trustee can start paying the beneficiary’s allowable HEMS expenses.
HEMS Standard also Assists with Significant Tax and Asset Protection Goals
By violating the HEMS standards, the trustee may inadvertently place the credit protection and tax protections of the trust at risk.
HEMS allows for asset protection because it prevents beneficiary’s creditors from obtaining trust assets (compared to a trust that is instructed to distribute to a beneficiary without any ascertainable standard). If a trustee is instructed to pay for "anything and everything" that would include creditors!
The ascertainable standard of HEMS allows the beneficiary being sued by creditors to demonstrate that they do not have complete control over the trust because the trustee is not allowed to make distributions for “anything and everything,” the trustee has to abide by HEMS restrictions.
The trustee can refuse to pay creditors, with proper HEMS language -- and assuming that prior payments from the trust have followed that standard, because paying creditors is not an allowable distribution and the trustee has a fiduciary obligation to honor the terms of the trust.
We would also want to ensure that the trust has proper spendthrift provisions as well for creditor protection.
The HEMS standard also helps prevent the value of the accounts and property held by the trust from being included in the beneficiary’s gross estate for federal estate tax purposes (especially if the same person is both trustee and beneficiary).
If you are in Florida and want to discuss any estate planning, revocable trust, irrevocable trust matter (or Medicaid planning or probate), please schedule a consultation today.
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