In the world of estate planning, you may come across the acronym HEMS from time to time and wonder what the heck it means. “HEMS” is a commonly used standard for distributions and is short for “health, education, maintenance, or support”.
When a trustee is limited to HEMS distributions, they must ensure that whatever they distribute to the beneficiaries falls within one of the four categories. Failure to do so can have negative consequences, including increased taxes and even loss of asset protection.
From a tax perspective, if a trust beneficiary is also the trustee (which is not uncommon), the HEMS standard prevents the value of the property in the trust from being included in the beneficiary’s estate for federal estate tax purposes.1
The HEMS standard is an Internal Revenue Service (IRS) safe harbor rule and can prevent the property in the trust from being subject to estate taxes at the death of the beneficiary or the trustmaker.
Another very important reason for a HEMS distribution standard is that, when combined with a spendthrift provision, it can protect the trust by preventing a beneficiary’s creditors from obtaining trust property. For example, if a beneficiary were being sued and the opposing party demanded that the trustee or beneficiary use trust property to pay the lawsuit judgment, the beneficiary and the trustee could both truthfully refuse because the trust clearly does not allow distributions for that purpose.
And because the trustee has a fiduciary responsibility to the trust beneficiary and not to the beneficiary’s creditors, the HEMS standard becomes a very effective tool to prevent lawsuits.
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 consequential decisions.
1Treas. Reg. § 20.2041-1(c)(2).2Christian S. Kelso,But What’s an Ascertainable Standard? Clarifying HEMS Distribution Standards and Other Fiduciary Considerations for Trustees6, Independent Trustee Alliance Conference (May 13, 2021) https://www.trusteealliance.com/wp-content/uploads/Paper-HEMS-and-Fiduciary-Duties-2021-ITA-Conference.pdf.
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