Trusts commonly provide that distributions may be made for the “reasonable maintenance, comfort and support” of the beneficiary. These are often part of the so-called “HEMS” standard — “health, education, maintenance and support” — that the Internal Revenue Service has deemed to create a safe harbor for certain tax purposes. If distributions are limited to this standard, for estate tax purposes they will not be considered to belong to the trustee when she dies even if she’s permitted to make distributions to herself. But what do these words really mean?
In Massachusetts
The case of Harootian v. Douvadjian (80 Mass. App. Ct. 565, October 4, 2011) helps answer this question. The decision indicates that these words give very wide discretion to the trustee. Andrew H. Ansbigian left a trust for the benefit of his wife, Beatrice, and also named her as trustee. The trust provided that she could make distributions for her own “support in reasonable comfort and maintenance.”
George Harootinian, remainder beneficiary of the trust and successor trustee to Beatrice, sued the executor of Beatrice’s estate for the return of $214,038, which he claimed was misspent because Beatrice had other resources to pay her bills.
The Court rejected this claim, following other cases that have held that similar language permits the use of trust funds for the beneficiary’s support whether or not they have other resources to cover their needs, unless it also contains limiting language, such as “when in need” or “if necessary.”
Without the requisite qualifying language in Arthur’s trust, Beatrice was not required to use her own assets before invading the trust principal to pay for her support. The plaintiff cites to no authority for the proposition that the word “reasonable,” appearing in the trust before “comfort and maintenance,” meant that Beatrice should have used her own assets so as to preserve the trust principal for the remainder beneficiaries.
This still left the question of what can be considered “reasonable.” The court found that this “is measured by reference to her standard of living before she became a beneficiary of the trust.” In this case, the plaintiff had the burden of proving that the expenditures exceeded this standard, and he failed to do so. As a result, Beatrice’s disbursements on her own behalf were upheld on appeal.
Hardly a Limitation
This means that including the HEMS standard in a trust is not much of a limitation on how the trust funds will be spent for the beneficiary. If the grantor wants the funds only to be used when they’re absolutely necessary to maintain the beneficiary’s standard of living, they can either put such limiting language in the trust or appoint an independent trustee who may be more likely to curtail expenditures than the beneficiary herself.
With husbands and wives in first marriages, this may not be necessary, since everything likely will pass to the same ultimate beneficiaries. But in the case of a second marriage, or if the surviving spouse marries again, it may be important to put specific language about these protections in the trust.
Ways HEMS Can be Miscontrued
Although the HEMS standard is a minor limitation on trustee discretion to distribute principal to a beneficiary, some courts without an understanding of the tax background of the HEMS standard have construed the language as obliging the trustee to pay for the health, education, maintenance and support of the beneficiary. One reason courts misinterpret such trust language is that trusts often use the word “shall” instead of “may,” saying that the trustee “shall pay for the beneficiary’s health, education, maintenance and support as the trustee in its sole discretion deems advisable,” or similar language. “Shall” in this context is meant to refer to the future, not to be a requirement. However, many judges with no experience in tax law or estate planning interpret it differently. To avoid confusion, it’s safer to replace “shall” with “may.”
