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://www.galliganmanning.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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Estate Planning for Blended Families

When a couple in a blended family fails to address what will happen after the first spouse dies, families often find themselves embroiled in disputes.  According to the article “In blended families, estate planning can have unintended issues” from The News-Enterprise, this is more likely to occur when spouses marry after their separate children are already adults, don’t live in the parent’s home and have their own lives and families.

In this case, the spouse is seen as the parent’s spouse, rather than the child’s parent. There may be love and respect. However, it’s a different relationship from long-term blended families where the stepparent was actively engaged with all of the children’s upbringing and parents consider all of the children as their own.

For the long-term blended family, the planning must be intentional. However, there may be less concern about the surviving spouse changing beneficiaries and depriving the other spouse’s children of their inheritance. The estate planning attorney will still raise this issue, and the family can decide how important it is to them.

When relationships between spouses and stepchildren are not as close, or are rocky, estate planning must proceed as if the relationship between stepparents and stepsiblings will evaporate on the death of the natural parent. If one spouse’s intention is to leave all of their wealth to the surviving spouse, the plan must anticipate trouble.

One very common approach to this issue is to set up a trust for the surviving spouse, which is often called a marital trust.  This establishes a trust for the benefit of the spouse, but whatever remains in the trust will go to the deceased spouse’s beneficiaries.  So, you can have your spouse benefit from your money, but make sure what’s left goes to your kids.

In some families, there is no intent to deprive anyone of an inheritance. However, failing to plan appropriately—having a will, setting up trusts, etc.—is not done and the estate plan disinherits children.

It’s important for the will, trusts and any other estate planning documents to define the term “children” and in some cases, use the specific names of the children. This is especially important when there are other family members with the same or similar names or perhaps a lack of clarity as to who the children are.

In Texas, this issue is even bigger when you don’t have an estate plan for a blended family.  If the decedent raised a stepchild in their home, they could potentially be considered a child of the decedent through adoption by estoppel.  If that’s true, then they are a child as far as the estate is concerned.

As long as the parents are well and healthy, estate plans can be amended. If one of the parents becomes incapacitated, changes cannot be legally made to their wills. If one spouse dies and the survivor remarries and names a new spouse as their beneficiary, it’s possible for all of the children to lose their inheritances.

Most people don’t intend to disinherit their own children or their stepchildren when estate planning for blended families. However, this occurs often when the spouses neglect to revise their estate plan when they marry again, or if there is no estate plan at all. An estate planning attorney has seen many different versions of this and can create a plan to achieve your wishes and protect your children.

It also makes sense to consider the children’s role in your finances as you age as the blended family situation may complicate the matter.  See this article where I addressed that more specifically.  https://www.galliganmanning.com/the-blended-family-and-issues-with-finances-and-estate-planning/  

A final note: be realistic about what may occur when you pass. While your spouse may fully intend to maintain relationships with your children, lives and relationships change. Clients often struggle to confront this or admit it to themselves, but I assure you it comes out later, and we can plan better when all of the issues are addressed.  With an intentional estate plan, parents can take comfort in knowing their property will be passed to the next generation—or two—as they wish.

Reference: The News-Enterprise (Dec. 7, 2021) “In blended families, estate planning can have unintended issues”

 

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