HEMS Requirement: What does it provide for?
Many trusts provide distributions for a beneficiary’s health, education, maintenance, and support (collectively “HEMS”). This language is used as a standard throughout the estate planning industry because it provides guidance to the trustee on how to manage the trust. It also provides enough of a measurable limitation on the distribution of wealth to allow the grantor to provide for and effectively pass wealth to the beneficiary without creating unnecessary tax implications.
But what does HEMS provide for practically? The purpose of the HEMS standard is to maintain a beneficiary’s accustomed standard of living in each category according to the trust. There are no bright-line definitions, but this ambiguity can provide beneficial flexibility for the trustee to determine what to do in the best interests of the beneficiary.
Generally, a trustee must exercise his or her reasonable discretion to interpret the terms of the trust according to the grantor’s intent to provide for the beneficiary. This includes considering that status of the trust funds and the present and future needs of the beneficiary to determine what is reasonable in a given situation.
Threfore, what qualifies as an appropriate HEMS distribution is whatever the trustee determines to be reasonable to maintain the beneficiary in a comfortable lifestyle in accordance with his or her accustomed standard of living and the grantor’s intent. At the end of the day, the trustee has the duty to exercise reasonable judgment.
When determining how to exercise his or her discretion for HEMS, a trustee should consider the following factors to determine reasonableness:
the size of the trust estate,
the beneficiary’s age, life expectancy, and condition of life,
the beneficiary’s present and future needs,
the other resources available to the beneficiary’s individual wealth, and
the beneficiary’s present and future mental and physical health.
While the possibility of appropriate distributions under a HEMS standard can technically be limitless, the following have been approved by a court of law and can generally be relied on as a reasonable distribution as circumstances allow.
Health
As you might expect, health expenses include just about any type of medical expense not covered by insurance, but it can also include more unconventional and indirect health and well-being expenses such as:
emergency and regular medical treatment
hospital stays
surgeries, including cosmetic surgeries and lasik surgery
health, dental, or vision insurance premiums
orthodontics
prescription medications
dental and vision care
physical therapy and rehabilitation services
handicap transportation
health-related home renovations
specialized cleaning services to remove allergens
home health care
mental health counseling and therapy
alternative treatments (like acupuncture, chiropractic, or homeopathic care)
medical devices like wheelchairs, glasses, contacts, and hearing aids
gym, spa, and golf club memberships
exercise equipment
vacations or retreats to improve mental health or decrease stress
Education
Education distributions are generally fairly straightforward as well, but they can encompass more than just traditional tuition and can include more indirect expenses such as:
tuition fees for public or private elementary, secondary and high school educations
tuition for medical school, law school, or another professional school
tuition for vocational and technical trainings including certifications as a professional yoga or scuba instructor
costs for long-term studies or “career students”
books and supplies including laptops or software
room, board, and other living expenses while in school
tutoring
speech or reading therapy
uniforms and school clothes
support of a beneficiary while in school or during unpaid internships
support of a beneficiary between semesters
extracurricular activity fees, expenses, and paraphernalia
special education needs
fees for standardized tests
daycare expenses to allow a parent to attend classes and study
study abroad programs with associated travel costs
Maintenance and Support
Maintenance and support are generally treated as synonymous terms that overlap in meaning. Maintenance expenses are meant to capture day-to-day living expenses, and support anticipates any other financial assistance needed for the beneficiary’s welfare. These categories are meant to keep the beneficiary in reasonable comfort and should not be limited to the bare necessities of life. Generally, expenses that fall into the maintenance and support categories of HEMS include:
normal home furnishings and household items
phone and internet services
life insurance
mortgage payments and down payments on a home
property/casualty/liability insurance for home, auto, etc.
rent payments
home repair and maintenance
support of family members, including the educational expenses of the beneficiary’s children
automobiles
home repairs
taxes and legal fees
reasonable vacations according to the accustomed standard of living
continuation of family gifting
charitable gifting
support for beneficiary engaged in charitable endeavors
assistance in starting a business
What is not included in the HEMS standard?
Anything that the trustee—when considering the intent of the grantor of the trust and the reasonableness factors outlined above—determines in his or her reasonable discretion to be an inappropriate distribution is impermissible according to HEMS. The trustee is accountable to the court for his or her management of the trust and has a duty to manage the trust and distributions in a reasonable manner. The trustee may be called upon by the beneficiary to given an accounting for distributions, and he or she should be prepared to explain the reasonability of a decision before a court.
When in doubt, most trusts provide that the trustee may and should use the trust funds to seek advice of counsel from legal and financial professionals. Call us at (512)374-4922 to talk to our attorneys about the HEMS standard!