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Trust Distributions to Beneficiaries under a HEMS or Ascertainable Standard

January 13th, 2023

Posted in Asset Protection,Tax Law & IRS Defense,Wills, Trusts & Estate Planning

“HEMS” stands for “health, education, maintenance, and support” and is commonly referred to as an “ascertainable standard”. If there is a HEMS provision in a Trust, the money distributed can only be used for specific needs of the beneficiary related to health, education, living expenses, or other needs or support that a Trustee can ascertain. Some examples include health insurance, surgery, exercise equipment, prescriptions, tuition, career training, rent, mortgage payments, home repairs, taxes, legal fees, vacations, or other reasonable comforts.

The idea is to keep the beneficiary in his or her accustomed standard of living by providing funds to “maintain and support” not only the necessities in life but also to account for future needs. If similar spending patterns of the beneficiary are considered, no ‘red flags’ should be raised that could jeopardize the Trust’s tax and asset protection. By comparison, words in a trust such as “best interests” or “happiness” are unascertainable standards under the Income Tax Regulations.

Using the HEMS provision in Trusts can be beneficial for:

  1. Tax purposes – estate taxes can be avoided if the settlor/grantor/trustmaker or beneficiary dies. It also reduces the risk of unnecessary taxation as wealth passes through generations.
  2. Asset protection – to prevent a beneficiary’s creditors from reaching the Trust assets. There may also be divorcing spouses and other predators seeking access to the Trust.

The Trustee ultimately has the authority to decide whether an expense qualifies. Therefore, the Trustee must use discretion when making distributions. This is to demonstrate to those who may be trying to access the Trust for their own benefit (e.g. lawsuits or the IRS) that the beneficiary does not have complete control over the Trust. A HEMS provision in your Trust is a great way to protect your beneficiaries and where it’s difficult to set a specific dollar amount for a beneficiary to receive on a periodic basis, as life changes for loved ones and so do their needs. You need to ensure that it is used properly and distributions are made appropriately.

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