The criteria for the distribution of trust can be very broad. In fact, the trustee can be given the authority to distribute to the beneficiary at the trustee’s sole discretion. This type of discretionary trust can provide asset protection if the trustee is not the beneficiary. However, if the beneficiary is a trustee, the trust’s assets will be subject to the beneficiary’s/guardian’s creditors (at least in most states). It may also lead to inclusion in the beneficiary/guardian’s taxable property. After all, the trustee will have “general power of assignment” under Section 2041 of the IRC because the trustee can assign assets to itself as a beneficiary. Conversely, if the beneficiary is not the trustee, he has no way of enforcing any distributions by the trustee, which is why such a trust usually provides asset protection. Usually, the creditor stands in the place of the debtor.
However, the regulations in Section 2041 make an exception when a trustee is acting under a “verifiable standard.” Certainly, if the trustee were to instruct the trustee to distribute $1,000 per month to itself as a beneficiary, this would not be a public authority to assign because it would be “verifiable”. However, the limits of verification are much wider.
treasure. Reg. 20.2041-1(c)(2) states that “Power is limited to [an ascertainable] normative if the extent of the holder’s duty to exercise authority and not to exercise authority is reasonably measurable in terms of his needs for health, education, or support (or any combination thereof).’ The Regulation continues to state that the terms “support” and “maintenance” are synonymous. Many trusts use this “safe harbor” language from the regulations, “Health, Education, Maintenance, and Support,” which is sometimes referred to as the “HEMS” standard. While the HEMS standard is a tax law verifiable standard, it is still Very flexible and difficult to determine exactly what is required.But it will allow the beneficiary to go to court to enforce the standard.
Let’s look at a typical example of the difference between a fully discretionary standard and a HEMS standard. Mary is the trustee of the trust and John is the beneficiary. If the trust states that Mary makes distributions to John at her sole discretion, then she won’t be wanted to distribute anything to John. On the other hand, if the trust provides the HEMS standard, then Mary will need to make distributions in favor of John or at least in favor of him for a lower level. But, Marie can decide to provide this minimum or more. For example, Mary could specify that John only needs a studio apartment in a working-class neighborhood. In turn, she can determine that John needs a bigger house in a nicer neighborhood. Marie would have a similar level of recognition in other areas as well. She can hand out enough for John to get rid of him or enough for him to live more comfortably.
The HEMS standard, although it can be ascertained, is not specific. Provides a range in which the guardian can operate. If a dispute arises about the limits of this scope, the court will be the final verdict.
Stephen C. Hartnett, JD, LLM
American Academy of Estate Planning Lawyers, Inc.
9444 Balboa Street, Suite 300
San Diego, CA 92123
Phone: (858) 453-2128