Understanding the Ascertainable Standard of Health, Education, Maintenance, and Support in Trusts

In estate planning and trust administration, the term "ascertainable standard" is used to define specific limits and guidelines under which a trustee can make distributions to a beneficiary. The standard most commonly seen is one tied to the beneficiary’s "health, education, maintenance, and support" (often abbreviated as HEMS). This standard is foundational in protecting both the trustee's discretion and the beneficiary's welfare, while preserving the trust's tax-advantaged status.

Here's a video I made further discussing the HEMS standard.

Here’s a closer look at how this standard works, its purpose, and its impact on trust beneficiaries and trustees.

What Is the HEMS Standard?

The HEMS standard sets specific parameters for when and how trustees can make distributions to beneficiaries. In practice, this means that distributions can only be made to cover the beneficiary’s expenses that fall into the categories of Health, Education, Maintenance, and Support. This is considered an "ascertainable" standard because it provides a clear set of rules, reducing ambiguity for trustees and beneficiaries.

Using this standard allows the trust to retain certain tax protections while ensuring that funds are used responsibly for the beneficiary’s welfare. It also protects the trust from creditors to a certain extent, as distributions are limited to those deemed necessary for HEMS purposes.

Breaking Down HEMS: What Each Term Means

Each term in HEMS has specific legal implications and guidance, helping trustees and beneficiaries understand what qualifies for distribution.

1. Health: This term generally encompasses medical, dental, psychological, and physical care needs. It includes the cost of health insurance, doctor visits, prescriptions, surgeries, and other medical services. Many trusts interpret "health" broadly, sometimes covering holistic treatments or alternative therapies if reasonably necessary for the beneficiary’s well-being.
2. Education: Education expenses may include tuition, books, supplies, room and board, and fees associated with formal schooling, from elementary through graduate school. Some trusts also allow for continuing education, job training, and specialized programs, as long as these expenses support the beneficiary's educational growth.
3. Maintenance: This term can be somewhat broader, often covering living expenses required to maintain the beneficiary’s lifestyle, including housing, utilities, and transportation costs. Maintenance generally implies a level of financial support consistent with the lifestyle established for the beneficiary before the trust or in accordance with their needs at the time of distribution.
4. Support: Often used interchangeably with maintenance, support includes basic living necessities. Some trusts interpret support to cover costs needed to uphold a standard of living consistent with the beneficiary’s prior status or upbringing. This can vary widely depending on the trust's terms and the trustee’s interpretation.

Why Use the HEMS Standard?

The HEMS standard serves several important purposes in trust administration:

• Tax Benefits: By limiting distributions to these categories, trusts avoid being classified as "general powers of appointment," which could otherwise lead to higher tax liability for beneficiaries. Under the U.S. tax code, this standard protects the trust's assets from being fully taxable as part of the beneficiary's estate.
• Asset Protection: The standard provides a level of protection for trust assets, as it restricts discretionary distributions to specific, ascertainable needs. Creditors typically cannot access trust funds intended for HEMS purposes, shielding assets from potential liabilities that beneficiaries might incur.
• Trustee Guidance: For trustees, the HEMS standard provides clearer boundaries and reduces personal liability by defining the limits within which they can operate. It also helps avoid disputes with beneficiaries, who may have differing expectations for trust distributions.
• Beneficiary Welfare: By focusing on core aspects of the beneficiary’s well-being, the HEMS standard ensures that trust funds are used to meet legitimate needs. This is particularly beneficial for beneficiaries who may not be financially responsible or who require structured support.

Challenges with HEMS in Practice

While the HEMS standard offers structure, it also presents challenges:

• Interpretation Variance: Trustees often have discretion in interpreting what constitutes "maintenance" or "support," which can lead to conflicts with beneficiaries. For instance, if a beneficiary requests funds for luxury expenses, a trustee must determine if those are reasonable within the context of the HEMS standard.
• Changing Needs: The needs of beneficiaries can change significantly over time, especially in cases of health issues or evolving educational goals. Trustees must continually reassess the beneficiary's circumstances and may need to make judgment calls, which can lead to disagreements.
• Vagueness and Flexibility: The broad definitions can be both an advantage and a challenge. While they allow for tailored support, they can also lead to disputes or misinterpretations if a trustee's judgment does not align with the beneficiary's wishes.

Practical Tips for Trustees Administering HEMS Trusts

1. Seek Legal Guidance: Trustees should consult with an attorney familiar with estate law to understand the scope and limitations of the HEMS standard. Legal advice can also be invaluable when addressing unique or contentious distribution requests.
2. Document Decisions: Trustees should maintain thorough records of all distribution decisions, including the rationale behind each. This transparency can protect the trustee from liability and provide clarity for beneficiaries.
3. Communicate with Beneficiaries: Clear communication about the limitations and intent of the HEMS standard can reduce misunderstandings and align expectations.
4. Regularly Review the Beneficiary’s Needs: Trustees should revisit the beneficiary’s needs periodically to ensure that distributions align with current circumstances and that the trust is effectively meeting the intended support goals.

Conclusion

The HEMS standard is a powerful tool in trust administration, striking a balance between support for the beneficiary and protection of trust assets. While it requires careful interpretation, it ultimately serves as a flexible guideline that trustees can use to provide meaningful, tailored support. By understanding the HEMS standard and applying it thoughtfully, trustees can help ensure that the trust serves its intended purpose, providing security and structure for beneficiaries’ core needs while safeguarding the integrity of the trust.