February 03, 2025
One of the most critical decisions in estate planning is how to leave assets to your children or beneficiaries in a way that protects them financially and legally. For many clients, setting up a trust is the ideal solution, and incorporating specific strategies—such as the HEMS standard and choosing the right type of trustee—can provide long-term protection and flexibility. Let’s break down these important components and explain why they matter.
What is the HEMS Provision in a Trust?
A HEMS provision is a standard included in many trusts, allowing distributions for a beneficiary’s Health, Education, Maintenance, and Support. It guides the trustee on how trust assets can be used, ensuring they are distributed responsibly while offering protection against misuse and external threats.
HEMS Breakdown
- Health: Medical expenses, routine checkups, dental care, mental health counseling, gym memberships, alternative medical treatments, long-term care, and more.
- Education: Tuition, books, room and board, study abroad, career training, and related expenses.
- Maintenance and Support: Living expenses, mortgage payments, insurance, property taxes, and costs necessary to maintain the beneficiary’s lifestyle.
What’s not covered under HEMS: The HEMS standard generally doesn’t allow distributions solely for luxury purchases or wealth accumulation, like buying a sports car or making risky investments.
Why Include HEMS in Your Trust?
1. Controlled Distributions
HEMS provisions help ensure that beneficiaries receive the support they need without risking financial mismanagement. For example, a trustee could approve distributions for medical bills or tuition but deny requests for luxury items that don’t meet the HEMS criteria.
2. Tax Benefits
HEMS is recognized by the IRS as an ascertainable standard, meaning it can help prevent trust assets from being included in a beneficiary’s taxable estate. This is particularly beneficial when the beneficiary also serves as the trustee.
3. Asset Protection
HEMS provisions, when paired with a spendthrift clause, can shield trust assets from creditors, divorcing spouses, or legal judgments. If a creditor tries to access the trust assets, the trustee can refuse distributions that don’t fall within the HEMS standard, helping protect the trust’s integrity.
Choosing the Right Trustee: Interested vs. Discretionary Trustees
The trustee you choose plays a major role in how well the trust is protected. There are two main types of trustees to consider:
1. Interested Trustee
An interested trustee is someone who is closely related to the trustmaker or beneficiary, such as a parent, sibling, or child. While they are familiar with the family’s needs, they are required to follow the HEMS standard when making distributions.
Potential Risks:
- Since an interested trustee must make HEMS distributions, creditors—such as a divorcing spouse—could potentially argue that funds should be distributed for obligations like alimony or child support.
2. Discretionary Trustee (Independent Trustee)
A discretionary trustee is typically a neutral third party, such as a financial advisor, attorney, or trust company. They have more flexibility and can decide whether or not to make distributions based on the beneficiary’s needs or external circumstances.
Why They Offer More Protection:
- A discretionary trustee can refuse distributions if a creditor or legal threat arises, helping to safeguard the trust assets.
- They can negotiate settlements or refuse payments in situations like lawsuits, giving the beneficiary stronger protection.
Example: If the beneficiary is sued, the discretionary trustee can withhold distributions, preventing the trust from being used to satisfy a judgment.
Flexible Strategies to Maximize Protection
Even if you prefer to name an interested trustee (such as a family member), you can still build additional protections into the trust:
- Successor Trustee: Include a discretionary trustee as a successor. If a legal threat arises, the interested trustee can step down, and the discretionary trustee can take over.
- Resignation and Replacement: Allow the interested trustee to resign and appoint an independent trustee when needed.
This strategy ensures that if the beneficiary faces potential risks, the trust can pivot to protect their inheritance without disrupting day-to-day management.
What Does “No Demand Right” Mean, and Why Is It Important?
One critical component of a protective trust is ensuring that the beneficiary has no “demand right” to withdraw funds at will. A demand right—also known as a withdrawal right—can expose trust assets to creditors or predators.
Example: If a beneficiary can withdraw 25% of the trust at age 25 and the remainder at 30, a creditor could potentially claim that portion. By removing this right and leaving distributions at the discretion of the trustee under the HEMS standard, you add a layer of protection.
How to Structure the Trust for Long-Term Protection
1. Continuing Trusts
Rather than distributing assets outright, you can set up a continuing general needs trust that protects the inheritance for the beneficiary’s lifetime. This type of trust is particularly effective when paired with a HEMS provision and a discretionary trustee.
2. Gradual or Goal-Based Distributions
For example, you could specify that the beneficiary receives full access to their inheritance at age 35 or after completing a specific goal, like finishing college. Until then, the trustee manages distributions under the HEMS standard.
3. Successor Planning
Include instructions for how trust assets should pass to future generations or beneficiaries if the original beneficiary passes away. This ensures that the assets remain protected and within the family.
HEMS Provisions in Action: An Example
Let’s say you set up a trust for your son, Alex. The trust includes a HEMS provision and names Alex’s uncle as the discretionary trustee.
- Alex can receive distributions for medical expenses, tuition, and living expenses.
- If Alex is sued, the discretionary trustee can deny any distribution requests that would expose the trust assets to creditors.
- The trust does not allow Alex to withdraw funds outright, further protecting the assets from external threats.
Final Thoughts: Protecting Your Family’s Future
Estate planning is about more than dividing assets—it’s about protecting your legacy and ensuring your loved ones have the resources they need, when they need them, without the risk of financial harm. By including HEMS provisions and carefully selecting the right trustee, you can create a trust that offers long-term protection, flexibility, and peace of mind.
At JV Law Offices, we specialize in creating personalized trusts tailored to your family’s needs. Whether you’re just starting or need to review an existing plan, we’re here to help.
Contact us today to schedule a consultation and secure your family’s future.
This blog is our way of making sure you’re clued in and feeling good about this big life shift, with a helping hand from our team. Remember, we’re here to turn the legal jargon into something you can not only understand but use to empower your family. And, while we’re here to guide you through the legal landscape, remember this blog is for general information purposes and not a substitute for legal advice tailored to your unique situation
