What Is the HEMS Standard?

Many trusts for third parties reference “HEMS” language, namely health, education, maintenance and support.  The HEMS standard is used to inform trustees as to how and when funds should be released to a beneficiary, according to a recent article from Yahoo! News, “What is the HEMS Standard in Estate Planning.” Using HEMS language in a trust gives the trustee more control over how assets are distributed and spent. If a beneficiary is young and not financial savvy, this becomes extremely important to protecting both the beneficiary and the assets in the trust. Your estate planning attorney can set up a trust to include this feature, and it is commonly a feature in trusts we prepare.

When a trust includes HEMS language, the assets may only be used for specific needs. Health, education or living expenses can include college tuition, mortgage, and rent payments, medical care and health insurance premiums.

Medical treatment may include eye exams, dental care, health insurance, prescription drugs and some elective procedures.

Education may include college housing, tuition, technology needed for college, studying abroad and career training.

Maintenance and Support includes reasonable comforts, like paying for a gym membership, vacations and gifts for family members.  Many attorneys also expand upon this definition at the request of clients to expressly authorize money to be spent for business opportunities, vehicles, houses and so on.

The HEMS language provides guidance for the trustee.  However, ultimately the trustee is vested with the discretionary power to decide whether the assets are being used according to the directions of the trust.

In some cases, the HEMS standard is essential for asset protection.  For example, if I am the beneficiary of a trust and also my own trustee, it isn’t a good idea for me to have unfettered discretion on using the trust funds.  If I did, a creditor of mine could require me to use that discretion to pay them.  Instead, it would be better if the trust limited the ability to distribute to HEMS as the trust can still assist with my health, education, maintenance and support.  You’ll notice however, that HEMS does not include my creditors. See this article for a similar issue discussing creditors and divorces of beneficiaries. https://galligan-law.com/protecting-inheritance-from-childs-divorce/

Sometimes beneficiary requests are straightforward, like college tuition or health insurance bills. However, maintenance and support need to be considered in the context of the family’s wealth. If the family and the beneficiary are used to a lifestyle that includes three or four luxurious vacations every year, a request for funds used for a ski trip to Spain may not be out of line. For another family and trust, this would be a ludicrous request.

Having HEMS language in the trust limits distribution. It may also, depending on the situation, be beneficial to have distribution restrictions so that the trustee can reply “no” when a beneficiary becomes too used to using trust money.

Giving the trustee HEMS language narrows their discretionary authority enough to help them do a better job of managing assets and may limit challenges by beneficiaries.

HEMS language can be as broad or narrow as the grantor wishes. Just as a trust is crafted to meet the specific directions of the grantor for beneficiaries, the HEMS language can be created to establish a trust where the assets may only be used to pay for college tuition or career training.

Reference: Yahoo! News (Jan. 7, 2022) “What is the HEMS Standard in Estate Planning”

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Update on Estate and Gift Taxes for 2022

There was a lot of discussion last year about potential changes to the federal estate and gift tax laws.  It’s possible that some of these proposals may be enacted in 2022, but for now, none of them have passed.  In the meantime, exemptions have increased for inflation, giving taxpayers a chance to lock in rates and exemptions before the federal estate tax sunsets to $5 million and some “change” for inflation. You can see a fuller explanation in the recent article, “2022 Transfer Tax Update,” from Forbes.

For now, the increased estate and gift tax exemptions are:

  • In 2022, $12,060,000 federal estate tax exemption, with a 40% top federal estate tax rate.
  • $12,060,000 GST tax exemption and a 40% top federal GST tax rate.
  • The lifetime gift tax exemption is now $12,060,000; with a 40% top federal gift tax rate.
  • The annual gift tax exclusion for 2022 increases to $16,000.

The IRS and the Treasury Department have both stated they will not attempt any claw-backs from gifts given between 2018—2025 for a taxpayer who dies in 2026 or beyond, when the exemptions return to the $5 million mark under the 2012 Act.

The opportunity to take advantage of these exemptions is now. A variety of estate planning techniques are still available to address estate and gift tax. Shifting income-producing assets to individuals in lower income tax brackets or who live in states with no or lower income taxes may be appropriate.  It might make sense to make substantial gifts in 2022, but that will be a case by case analysis.  You can see this past article discussing that more, although it should be tempered by the current tax picture: https://galligan-law.com/gifting-and-estate-taxes/  

Does this mean your estate plan needs to be revised? If you’re like most people, your estate plan is relatively flexible. However, if you haven’t reviewed or revised your estate plan in two or three years, it’s time to make an appointment with your estate planning attorney. There have been many changes in the law in recent years, and chances are, changes in your life since the last time your plan was reviewed.

The GST tax is not portable on the death of a spouse. Certain states (including New York, Connecticut, and Massachusetts) don’t permit estate tax exemption portability. A bypass trust may be the solution.

The gift tax annual exclusion amount has increased to $16,000 for individuals ($32,000 by married couples). It may be better to gift securities of interests in privately held companies or other family entities. Assets gifted now may be worth less than they were previously, and if they increase in the future, you’ve created a built-in discount.

Talk with your estate planning attorney to make the most out of these tax situations before they go away.

Reference: Forbes (Jan. 4, 2022) “2022 Transfer Tax Update”

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Should I Use a Corporate Trustee?

Recently, a client decided to include a corporate trustee as part of their estate plan.  When discussing the matter, they were surprised at how affordable they can be, and that they were glad they choose that route.  Thinking of that conversation and how important it is to name a proper trustee, I wanted to highlight some benefits of corporate trustees.

The Quad Cities Times’ recent article entitled “Benefits of a corporate trustee” warns that care should be taken when selecting someone to serve in this role. Now, many clients have loved ones in their lives who are capable of serving as a trustee or other fiduciary, but for some, family members may not have the experience, ability and time required to perform the duties of a trustee. Those with personal relationships with beneficiaries may cause conflicts within the family. You can name almost any adult, including family members or friends, but think about a corporate or professional trustee as the possible answer.  I also covered how to choose a trustee here:  https://galligan-law.com/how-to-pick-a-trustee/

Here are some reasons to use a corporate trustee:

Experience and Dedication. Corporate trustees can devote their full attention to the trust assets and possess experience, resources, access to tax, legal, and investment knowledge that may be hard for the average person to duplicate. It’s their job and they hire professionals with backgrounds in these areas.  Many people who choose a corporate trustee do so for this reason.

Relative Cost.  This may seem a strange reason to consider a corporate trustee.  Most people don’t consider them at all because professionals will charge fees to serve.  However, trustee fees are often regulated by law or by the trust document.  Both individuals such as family members, and corporate trustees might only be able to charge the same rate.  Given the fact the trust might pay your middle child and an office of professionals the same rate, that isn’t a bad deal.  Further, corporate trustees sometimes take assets under management.  This means they would invest your assets for you, and therefore make money on the investments like a financial advisor does.  If they do, they often include those fees at a reduced rate when serving as a trustee.  This means you actually save money in the end.  It is also possible that they don’t take money under management so that your investment advisor can continue to invest the funds if that’s your preference.

Successor Trustee. If you choose to name personal trustees, you may provide in your trust documents for a corporate trustee as a successor, in case none of the personal trustees is available, capable, or willing to serve. Corporate trustees are institutions that don’t become incapacitated or die. You should consider the type of assets you own and then choose the most qualified trustee to manage them.

Middleman.  Clients sometimes struggle to admit to their estate planning attorney that their families don’t get along.  They don’t want to talk about how a child of theirs struggles with addiction, is dependent on them for support or otherwise would be difficult for a family member trustee to deal with.  In that situation, corporate trustees have the benefit of professional detachment.  The beneficiary can be as angry with them as they want, and the anger won’t be directed to one of your loved ones.  This can make professional trustees an attractive middleman or wall between a difficult beneficiary and the rest of the family.

In sum, many estate owners can benefit from the advantages of a corporate trustee.

Ask an experienced estate planning attorney when working on a trust about naming the appropriate corporate trustee, and the advisability of including terms for your registered investment advisor to manage assets for your trust.

Reference: Quad Cities Times (Nov. 28, 2021) “Benefits of a corporate trustee”

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