HEMS (Distribution/Standard)

HEMS is an acronym for “Health, Education, Maintenance and Support”. HEMS provisions are commonly found in trust instruments to allow for, or mandate, the payment of qualifying expenses under the HEMS standard. The spirit of such a provision is to provide for the care and comfort of the beneficiary or beneficiaries via trust distributions for certain types of expenses. A HEMS provision is instructive for the Trustee because it defines (arguably loosely) what a permissible distribution to the beneficiary or beneficiaries is. This may also serve to reduce the liability of the Trustee in a situation whereby a beneficiary wishes to contest the validity of a distribution made to another beneficiary or class of beneficiaries.

The Health and Education categories are straightforward. Maintenance and Support are two shades of the same colour and the difference between them, if any, is subjective. This can allow the Trustee to exercise more discretion to make distributions whilst still adhering to the HEMS standard and benefitting from the IRS safe harbor rule that precludes the Trust property being subject to estate tax upon the death of the Trustee or Beneficiary.

Permissible HEMS distributions can vary by state but what follows is a non-exhaustive list of distributions types.

Health Distributions

• Health checks
• Dental work
• Gym membership fees and exercise equipment
• Health Supplements
• Medicine
• Some elective medical/cosmetic procedures
• Counselling and therapy
• Equipment/retrofitting for the disabled and infirm
• Optical care and treatment
• Health insurance premiums

Education Distributions

• Tuition fees including board and utilities
• Books
• Online courses or other vocational training
• Tutor fees
• Certifications
• Other expenses incurred by the beneficiary in pursuit of personal educational advancement

Maintenance Distributions

• Miscellaneous insurance premiums
• Home and property repairs
• Legal and consulting fees
• Vehicle acquisition cost and maintenance expense

Support Distributions

• Vacations
• Downpayments for homes
• Seed capital for business ventures
• Gifts
• Income support

Mr. Client is the Grantor of an irrevocable trust. He settles 5,000,000 USD onto the Trust and the money is invested by the professional Trustee in accordance with the Trust Instrument. The Trust has x2 beneficiaries- the x2 children of Mr. Client.

Mr. Client is concerned that his children’s belief that they are “rich” will result in his children having a poor work ethic and no motivation to develop their own skills and abilities. Mr. Client wishes for the children to have a solid foundation in life and for their basic needs to be accounted for, but does not want to finance a life of luxury- that is not how he himself grew up, and he does not want that for his children. In other words, the Trust should provide ‘enough money to do anything, but not nothing’.

By design, and in accordance with the Trust Instrument, the Trustee has the discretion to make payments to the x2 beneficiaries based on the HEMS standard. The children’s cost of living can be met by the trust, along with occasional discretionary support benefits as seen fit by the trustee- but neither child will be spending Trust money on the Las Vegas strip.