Is There A Standard “Standard” For Trust Distributions? Why Is The HEMS Standard So Common?

Is There A Standard “Standard” For Trust Distributions? Why Is The HEMS Standard So Common?

Irrevocable trusts (including trusts created within a will as well as irrevocable trusts created within a revocable living trust) give guidelines to a trustee as to how distributions are to be made in accordance with your desires.  Some prefer mandatory distributions (i.e., trustee must give $1000 month for 10 years). Some prefer “wholly discretionary” trusts whereby the trustee has sole discretion to make distributions as determined solely by the trustee.  The typical wording is that “the trustee may (or shall) make distributions to the beneficiary or beneficiaries in its sole and absolute discretion”.  This may give the trustee more protection from a beneficiary.  Others prefer an ascertainable standard – most typically for the health, education, maintenance and support of the beneficiary.  As a result, there is some limit on what the trustee can distribute – even if the standard is very broad.  An unascertainable standard is also considered a limited discretionary distribution standard.

Texas courts have held that a beneficiary cannot sue a trustee for breach of fiduciary duty for failing to make a distribution when the trustee has complete discretion to make a distribution unless the trustee is in violation of the fundamental interest of settlor (the one who makes the trust) – so the trustee must act in good faith.

Some prefer a trust that has some standard (i.e., a trustee may make a distribution for the pleasure, desire, comfort, happiness, benefit and welfare of the beneficiary).  This unascertainable standard is used when there is less concern about maintaining the trust principal for the remainder beneficiaries or to give the trustee more flexibility in making distributions.  However, this could result in some tax issues – especially if it is a taxable estate.

Rightfully or wrongfully, the most common standard used for trust distribution is an ascertainable standard – typically for the beneficiary’s “health, education, maintenance and support” – which is often referred to as HEMS standard. Due to asset protection or tax reasons, this is most commonly used as follows:

Creditor Protection with Ascertainable Standard

Under Texas law, if the trust has a spendthrift provision (a limitation of the beneficiary’s access to the trust as the assets belong to the trust – not the beneficiary) and it is coupled with an ascertainable standard, then a creator generally cannot attach the beneficiary’s interest.  However, it should be noted if the beneficiary who is also a co-trustee has to get permission of the other co-trustee, this would also give creditor protection even without an ascertainable standard.

Tax Reasons for Ascertainable Standard

The IRS has created ascertainable standards.  The assets in a trust with an ascertainable standard will not be considered part of the beneficiary’s estate.  This is important for those with taxable estates – in year 2024, the estate tax limit is $13,610,000.  However, the limit is supposed to go down to ½ of the limit of what it would have been at the end of year 2025 (so it will probably go down to around $7.5 million).  Most Texans do not have a taxable estate.  Also if the trust gives discretion to make distributions to other beneficiaries subject to the standard, gift tax liability may be avoided.

The ”health” and “education” standard are fairly easy to determine.  “Support” and “maintenance” are a little murky.  Expenses for food, transportation, mortgage payments, property taxes, vacations, health insurance, care, continual pattern of family or chartable giving and life and property insurance are considered support and maintenance.  However, distributions to merely enlarge the beneficiary’s personal estate or simply make the beneficiary happy or content are not included.  Words added for beneficiary’s “accustomed style of living” may give more discretion than bare needs.

A HEMS standard should also be a potential concern if the beneficiary was getting public benefits such as Medicaid.  In many states, if there is a HEMS standard, a beneficiary could go to court to compel a distribution.  A wholly discretionary standard without HEMS language would be considered if there is more of a concern that a beneficiary may attempt to go to court to compel a distribution.

Every trust should be different as your goals are determinative of the language to be used.

If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.

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