A common issue in estate planning is the desire to make gifts to loved ones on government benefits without reducing those benefits. A special needs trust (SNT) with a health, education, maintenance and support (HEMS) standard can be a solution.
A SNT can be a great tool to help provide for a beneficiary on public benefits. SNT’s allow a beneficiary to remain eligible for public benefits while benefitting from other assets and resources. The Trust owns the assets and the Trustee manages them, so the beneficiary of a SNT cannot be Trustee. But in many cases, it is ideal for someone else to manage the assets because the beneficiary could not adequately do so themselves.
Resources such as the Special Needs Alliance’s Trustee Handbook can provide guidance and information to help Trustees avoid making distributions that could affect their beneficiary’s public benefits. But the SNT itself should define the Trustee’s discretion.
The HEMS Standard
A Trust can give a Trustee broad discretion, limited discretion or anything in between. A common standard for SNT Trustee discretion is the HEMS standard. “HEMS” stands for “health, education, maintenance and support.”
Health refers to anything concerning physical or mental care, including medical exams, treatment, equipment and therapy.
Education can cover costs for college education, trade school or training programs, including tuition, books, rent, groceries and more. Education is not always included in this standard, particularly when a beneficiary would not benefit from education.
Maintenance and support can include general cost of living expenses and things like gifting or vacation that help the beneficiary maintain the lifestyle they are accustomed to. This is a category where the trustee must be especially careful to consider the amount of funds in the trust and the beneficiary’s family history.
The HEMS standard focuses on providing for a beneficiary’s most basic needs. This helps to both protect public benefits and promote efficient use of trust funds. It also further narrows the scope of distributions to prevent people other than the beneficiary from using trust funds.
The Trustee’s Role
SNT’s and trusts for children most frequently use the HEMS standard. HEMS helps to ensure that trust funds provide care for individuals who may not be able to care for themselves. The HEMS standard provides some guidance to trustees, but it is still within the trustee’s discretion to determine if an expense fits into the standard. Even if a distribution fits into the HEMS standard, the Trustee must still determine that the distribution will not affect benefits. A Trustee technically can make a distribution knowing that it will affect benefits, but the Trustee should be able to adequately justify that decision.
We typically provide clients with a trustee guidance document. The guidance document includes a checklist with examples of appropriate distributions whenever we draft a SNT. But trustees should do some research before making a new type of distribution. It would be unwise to make a new distribution without knowing that it will not affect benefits.
The trustee’s role in a SNT is typically more involved because the beneficiary is likely a vulnerable individual. The trustee should visit the beneficiary at least annually to ensure that all of the beneficiary’s needs are being met.
Should most SNT’s use the HEMS standard?
Yes, and they probably do. The HEMS standard is useful for the reasons described above. But it is also useful because it is a well-understood standard. Most financial institutions and government agencies are at least somewhat familiar with the HEMS standard. Also, there are plenty of resources that discuss and define the HEMS standard. The popularity of the HEMS standard means that the trustee of a SNT does not have to decide completely on their own whether a distribution fits into the standard.
