Trustees are often granted the power to distribute trust property “in the Trustee’s discretion” for a beneficiary’s “general well-being,” “best interests,” “comfort,” or, most commonly, “health, education, maintenance and support.” This “health, education, maintenance and support” distribution standard is so common that most trustees and other trust advisors refer to it simply as the “HEMS” standard. The HEMS standard is common in trust planning because limiting distributions to such an ascertainable standard avoids a number of transfer tax pitfalls. Transfer tax issues, however, are not the only issues that a trustee must consider when making distributions. Sometimes the most challenging responsibility of a trustee is to know how far his, her, or its “discretion” reaches when distributions are limited to a distribution standard, including HEMS.
Of course, a trustee can and should rely on specific instructions contained within a trust agreement to determine the extent and breadth of their discretion. In the absence of clear instructions, however, a trustee risks liability for “abusing” their discretion when making or refusing to make distributions. For example, if a current beneficiary requests a distribution for an elective medical procedure, a trustee may be sued for making the distribution (by remainder beneficiaries whose remainder interest would be reduced) or for refusing to make the distribution (by the current beneficiary who requested the distribution).
This potential for liability for action or inaction puts trustees in a difficult position. Luckily, trust agreements, common and statutory trust law, and courts generally protect trustees from liability for the reasonable exercise of discretion for distribution decisions under the HEMS standard, which itself is relatively broad and open to interpretation. Nonetheless, a trustee (or a beneficiary) should consider engaging legal counsel whenever he or she believes a distribution decision may be called into question because the governing lawin any given jurisdiction may give rise to unanticipated results.
A look at selected cases that determine the grantor’s intent in the context of the HEMS standard demonstrates that a trustee’s duties are not always clear, even under frequently employed distribution standards like HEMS. For example:
- In Naughton v. First Nat’l Bank of Boston, 356 N.E.2d 1224 (1976), a trustee’s refusal to pay the medical expenses associated with a beneficiary’s last illness that came due after the death of the beneficiary was an abuse of discretion. The Court found that payments for support and health of the beneficiary extended past his death and the trustee breached his duty by refusing to pay for the beneficiary’s final medical expenses.
- In Lanston v. Childrens Hospital, 148F.2d 689 (D.C. Cir. 1945), a trustee refused to pay for a beneficiary’s room and board expenses between college semesters as such beneficiary was not actively in school at the time. The Court found that payments for education include support between college semesters.
- In New Britain Trust Co. v. Stoddard, 179 A. 642 (Conn. 1935), a trust was established to assist with educational expenses with the intention that the trust would vest while the beneficiaries were still of school age. The trust did not vest until the beneficiaries were well into their adulthood, and the Court determined that distributions for continued education of the adult beneficiaries were inappropriate.
- In Epstein v. Kuvin, 95 A.2d 753 (N.J. Super Ct. App. Div. 1953), a trust called for the education and support of a beneficiary. The beneficiary went on to attend medical school and the court found that distributions permitted for education did not include tuition beyond a four year undergraduate institution because it is outside the scope of the traditional meaning of education.
Maintenance and Support
- Compare Matter of Estate of McCart, 847 P.2d 184 (Colo. Ct. App. 1992), which required distributions to a beneficiary for his maintenance in the social and economic position in which he had been living at the time of the creation of the trust, providing for all comforts and necessities to which he had grown accustomed, and Kimball v. Reading, 31 N.H. 352 (N.H. 1855), which held that distributions of large sums of money for an extravagant trip were in poor judgment and an abuse of discretion because some luxuries, even if within the beneficiary’s standard of living, may still be considered outside the scope of a trust.
Consideration of Other Resources
- Compare Brennan v. Russell, 52 A.2d 308 (Conn. 1947), which supports the view that other resources should be considered when determining whether the HEMS standard has been satisfied under a trust instrument, and McClintock v. Smith, 29 N.W.2d 248 (Iowa 1947), where the court found that other resources should not be considered in making discretionary distribution decisions unless there is a clear showing of intent to the contrary.
For more information on this topic, please contact Chad Makuch (216-861-7535 or firstname.lastname@example.org) or Daniel McClain (216-861-7101 or email@example.com).