HEMS Standard in Trusts

The HEMS standard, common in trusts, is an arcane expression. That does it mean, and what’s the significance?

If the trust directs the trustee to pay attention to the “health, education, maintenance and support” of a beneficiary, that’s magic language intending to invoke the HEMS standard. It means that there is a recognizable test to apply to judge the trustee’s decisions. It often means that the trustee’s authority is limited in a way that makes the trust’s income tax effect easier to calculate and understand.

Sometimes the HEMS standard works against the trust’s goal. Then a trust might direct the trustee to support the beneficiary’s happiness, or well-being, or some other, amorphous description. This is often the case with special needs trusts, for example. That trust may be maintaining a fine line between favorable tax treatment and possible inclusion in the beneficiary’s estate.

Whatever the purpose, who decides which distributions are for “health, education, maintenance and support”? Some expenditures seem obvious. Others are arguable.

In this week’s podcast episode, we talk about the HEMS standard, what it means and how to interpret it. There are few bright lines, but we can give you some familiarity with the language, at least.