Many trusts say that “income” and/or “principal” are distributed for the beneficiary’s “Health, Education, Support and Maintenance” (“HEMS”). Why is the HEMS standard used, what does it mean, and how is it applied and enforced?
The HEMS standard is an “ascertainable standard”. It is an objective (measurable) standard. A non-ascertainable distribution standard – e.g., distributions for beneficiary’s comfort and happiness – is not measurable because distributions are measured by the beneficiary’s personal wishes.
Using the HEMS standard helps protect trust assets from creditors of the beneficiary, from the beneficiary’s spouse or partner, and from the beneficiary’s bad choices. The trust may allow, or require, the trustee to make distributions “for the benefit” of the beneficiary by paying such expenses directly.
The HEMS standard gives the beneficiary ascertainable and enforceable rights. But how the HEMS standard applies depends on additional terms: Does the trust require HEMS distributions – i.e., the Trustee “shall” make HEMS distributions – or does the trust authorize HEMS distributions at the discretion of the trustee – i.e., the trustee “may” make HEMS distributions; does the trust require the trustee to consider the beneficiary’s other resources before making a HEMS distribution – i.e., the trustee “shall” first consider the beneficiary’s income and assets before making a distribution — or does the trust allow the trustee to consider the beneficiary’s other resources – i.e., the trustee “may” consider the beneficiary’s other income and assets before making a distribution; and does the trust give priority to some beneficiaries over other beneficiaries – e.g., the trustee shall first make distributions for the HEMS of minor children and only make HEMS distributions for adult children if there remains sufficient assets after taking into consideration the future needs of the minor children.
Saying that the trustee “may distribute” requires the trustee to exercise discretion. In California, generally, “a discretionary power conferred upon a trustee is not left to the trustee’s arbitrary discretion, but shall be exercised reasonably (section 16080 Probate Code). Moreover, subject to important exceptions, “if a trust instrument confers “absolute,” “sole,” or “uncontrolled” discretion on a trustee, the trustee shall act in accordance with fiduciary principles and shall not act in bad faith or in disregard of the purposes of the trust (section 16081 Probate Code).”
Next, what does “health, education, maintenance and support” include? It includes the beneficiaries “needs” – as opposed to “wants”. It is not necessarily limited to “basic needs”. The trust may define these terms, either expansively or narrowly.
Generally, “health” includes both mental and physical health. Education is often broad and may include private high school, vocational school, occupational training. The trust may define the “education” to say whether it includes sports, room and board, computer, and a spending stipend. “Maintenance and support” means the beneficiary’s standard of living. The trust may further define what standard of living applies. Is it limited to the “beneficiary’s accustomed manner of living” or may the trustee increase the beneficiary’s standard of living? “Maintenance and support” includes rent, daily living expenses, transportation, utilities and vacations (amongst many others), but again may be defined.
The trustee owes a fiduciary duty to the beneficiary to faithfully and competently carry out the terms of the trust as written. The trustee must avoid conflicts of interest and may not favor one beneficiary over another (unless permitted by the trust). If the trustee breaches (violates) his or her “fiduciary duties”, the beneficiary may petition the court to require an accounting and hold the trustee require. Alternatively, the beneficiary may petition the court for instructions to the trustee to order distributions.
The foregoing is a partial and simplified discussion of a larger and fact specific subject. It is not legal advice. Consult an attorney for guidance.
Dennis A. Fordham, attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at Dennis@DennisFordhamLaw.com and 707-263-3235.