A trustee is the individual you will appoint to manage the assets of your trust and to make sure the instructions you leave in the trust document are appropriately interpreted and followed. When a beneficiary approaches the trustee and asks for trust funds, should the trustee make the distribution? Perhaps as importantly, what should the trustee not pay for?
Typical trust language allows the trustee broad discretion when making distributions. For tax planning, the IRS allows a trustee to make distributions for “health, education, maintenance, and support” (or some combination of those four words) — called an ascertainable standard or a HEMS standard — without causing the distribution language to have estate tax problems. But what do those words really mean? If your trustee doesn’t know your feelings on trust distributions, then the trustee may turn down requests from trust beneficiaries that you may wish the trustee to make. Perhaps worse, the trustee may make distributions that you do not want made.
One of the most important things for a trust to pay for is health expenses. These could be limited to such things as emergency health care or prescriptions, or it could be broad enough to include routine check-ups. “Health” is a legal term of art in trust drafting — it does not typically cover health insurance expenses, so you will want to make sure your attorney knows whether you wish for the trust to cover these expenses or not when you are having your trust drafted.
Your trust can be used to pay for your beneficiary’s college education. When it comes to trust language, “education” is another legal term of art . . . it typically means a two- or four-year college degree. Many trustees will give some leeway to this language and will allow funds to be used for technical school as well. What it does not typically cover, unless defined elsewhere in the document, is graduate school or other professional training. Make sure your document defines what “education” means so that there is no confusion.
Support and Maintenance
In trust lingo, support and maintenance really means “living expenses;” your trust can be used to pay for the daily living expenses of your beneficiary. This can be a bit of a double-edged sword; we don’t want to leave our beneficiaries out in the cold if they lose their jobs or if they incur unexpected or urgent expenses. On the other hand, being allowed to take a monthly stipend from trust fund can have the effect of creating a lazy and unmotivated beneficiary. Beneficiaries may also come so used to trust funds supplementing their income that when the trust runs dry, they are unable to adjust their standard of living. You may want to require your trustee to take into account your beneficiary’s outside resources before making a distribution. Also consider a trustee making distribution to a beneficiary who struggles with substance abuse; these distributions could do more harm than good. Your estate attorney can advise you on proper distribution language for virtually any special circumstance.
Comfort and Reasonable Luxuries
Recall that the “HEMS” standards outlined above limit a trustee’s expenditures in order to protect the beneficiary from estate taxation problems. When estate taxes are not a concern, trusts may become much more liberal with distributions. Language referring to comfort and reasonable luxuries allows the trustee to make distributions outside of what is typically allowed under the HEMS standard, such as vacations, a nicer car, a better home, and perhaps some gifts. Attorneys may add additional language that can customize the distributions a trustee may make, allowing you to create a trust that truly fits the needs of your beneficiaries.
Ultimately the trustee will make distributions based on a number of factors, such as the purpose and size of the trust, the intended duration of the trust, the ages of the beneficiaries and their anticipated financial needs later in life, the requirements and expectations of future trust beneficiaries, etcetera. But you will get the trustee started on the right foot if your trust language and trustee instructions are clear. If you are interested in learning more about how you can set up your trusts, please contact me.
Philip J. Ruce creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.
Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning