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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Preparing for an Estate Planning Meeting

Preparing for an estate planning meeting involves considering who you want to benefit, what you own and who is in charge of the processes.

Long ago when I first started doing Kevin’s Korners on Facebook and YouTube, I asked viewers for ideas on topics.  I expected to hear suggestions on how to administer estates, what is probate or complicated tax questions.  Instead, the first response, which was repeated by others, was what is the first step in making an estate plan.  What is the process to begin.  To put it another way, what to consider when preparing for an estate planning meeting.

So, for this blog I wanted to cover some topics and thoughts on preparing for the first meeting with an estate planning attorney.  Preparing to meet with an estate planning attorney for the first time is an opportunity to get organized and think about your wishes for the future. If you meet with your accountant every year to prepare tax returns, this may be a familiar process. It’s a chance to step away from day-to-day activities and focus on your life, as described in a recent article “Preparing for an Estate Planning Consultation: 10 Items to Consider Before Meeting Your Attorney” from The National Law Journal.  So with that, here are some issues to consider when preparing for an estate planning meeting.  This is by no means an exhaustive list, but should get you started in the right direction.  You can see here for the Kevin’s Korner video as well.  https://www.youtube.com/watch?v=B2M_-tBoSiU 

Minor Children Need Guardians. In most states, families with minor children need to designate one or more guardians to raise the children in the event both parents die. A successor should be named in case the first named guardian is unable or unwilling to serve. Discuss your decision with the people you are naming; don’t leave this as a surprise. Choosing these people is a hard decision. However, don’t let it be a reason to delay creating your estate plan. You do not want your family, or a Court, to guess what your wishes are in this regard.

Agents, Trustees, and Executors (Fiduciaries). A key component of an estate plan is who is in charge of the process, who executes your wishes or speaks for you if you can’t.  These roles, generally called your fiduciaries, are different depending on what task they need to accomplish and which legal document gives them that authority. With a Durable Power of Attorney, your assets can be managed by a named agent, if you become incapacitated. The person who manages your estate after death is the executor. They are named in your will. If you have trusts, the documents that create the trust also name the trustees. It is possible for one person to act as a fiduciary for all of these roles, although the tasks can be divided.  You also always want to consider back-ups should your first choices not be available.

Living Will and Medical Decision-Making. If you are unable to communicate your own medical wishes, an agent can make medical decisions on your behalf, including following the instructions of your Living Will.

Significant Property. Any items of significant property, whether their value is sentimental or monetary, should be considered specifically. This is helpful to avoid  squabbles over sentimental pieces of property, large or small.  Valuable or important property such as the home or business should be considered specifically to avoid delay, costs or other hazards that might affect their value or operation.

Beneficiaries.  This is probably the most obvious issue, but you should consider who will receive your property and in what manner.  For example, you might consider whether to leave your property outright to a beneficiary or put it in a trust to obtain various benefits.  You should consider if you want to take care of as much of your estate plan now as possible to make it easier for your loved ones later.  This is the decision of whether to utilize a will or a trust.  See here for a helpful guide.   https://www.galliganmanning.com/will-vs-living-trust-a-quick-and-simple-reference-guide/  You also should be familiar with the titling of your assets (your name, your and your kids’ names and so on) as well as which assets have beneficiary designations (life insurance and retirement funds are common examples) so that the assets coordinate with your plan.

You should also consider if there are any particular issues with your beneficiaries to be addressed.  For example, minor children may not receive assets until they become of age—18 in most cases- but that is hardly a prudent age to leave someone a windfall.  You can consider the use of a trust to delay the receipt of the property to a more reasonable age.  Similarly, you might want to create asset protection or divorce protection for your beneficiaries and can utilize trusts to help you accomplish that goal.  If you have a loved one with disabilities, you should consider what their needs are and are likely to be in the future.  What kind of resources do they need if you aren’t able to provide for them and where do they get that support.   As a final thought, if you are charitably minded, your estate plan is a great way to make charitable gifts and build a lasting legacy. Charitable donations can also be made to gain tax benefits for heirs.

Surviving Pets. You can plan for your pet’s care, if you pass away or become incapacitated before they die. Most states permit the creation of a pet trust, an enforceable means of providing assets to be used for the care and well-being of your pet.

Once you’ve considered the above in preparing for an estate planning meeting, you’ll have an idea of what your estate planning goals are.  That way, your meeting with a competent estate planning attorney will focus on how to accomplish those goals and you can discuss which documents are necessary to do so.

Reference: The National Law Journal (Feb. 23, 2021) “Preparing for an Estate Planning Consultation: 10 Items to Consider Before Meeting Your Attorney”

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Does Your Estate Plan Include Digital Property?

Many clients own digital property, but need estate plans utilizing new laws to control and protect their digital legacies.

One of the challenges facing estate plans today is a new class of assets, known as digital property or digital assets. When a person dies, what happens to their digital lives? According to the article “Digital assets important part of modern estate planning” from the Cleveland Jewish News, digital assets need to be included in an estate plan, just like any other property.

What is a digital asset? There are many, but the basics include things like social media—Facebook, Instagram, SnapChat—as well as financial accounts, bank and investment accounts, blogs, photo sharing accounts, cloud storage, text messages, emails and more. If it has a username and a password and you access it on a digital device, consider it a digital asset.  I wrote recently on this topic in response to Pennsylvania’s passage of a law addressing digital property, so see there for more details on what these assets are  https://www.galliganmanning.com/new-digital-asset-law-passes-in-pennsylvania/

Business and household files stored on a local computer or in the cloud should also be considered as digital assets. The same goes for any cryptocurrency; Bitcoin is the most well-known type, and there are many others.

The Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) has been adopted by almost all states to provide legal guidance on rights to access digital property for four (4) different types of fiduciaries: executors, trustees, agents under a financial power of attorney and guardians. The law allows people the right to grant not only their digital assets, but the contents of their communications. It establishes a three-tier system for the user, the most important part being if the person expresses permission in an online platform for a specific asset, directly with the custodian of a digital platform, that is the controlling law. If they have not done so, they can provide for permission to be granted in their estate planning documents. They can also allow or forbid people to gain access to their digital assets.  Texas has such a law, and we prepare our estate planning documents to address such property.

If a person does not take either of these steps, the terms of service they agreed to with the platform custodian governs the rights to access or deny access to their digital assets.

It’s important to discuss this new asset class with your estate planning attorney to ensure that your estate plan addresses your digital assets. Having a list of digital assets is a first step, but it’s just the start. Leaving the family to plead with a tech giant to gain access to digital accounts is a stressful legacy to leave behind.

Reference: Cleveland Jewish News (Sep. 24, 2020) “Digital assets important part of modern estate planning”

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