Hybrid Discretionary and Ascertainable Standard (HEMS) Trust Provisions

This is a feature in a third-party trust that can greatly enhance the asset protection of the trust property.  Some lawyers use only ascertainable standards (that is, health, education, maintenance and support [“HEMS”]) within a trust document for the trustee distribution standards.  These HEMS standards, when compared to fully-discretionary distribution standards, are much weaker for asset protection purposes.

Sure, there are tax law reasons for using HEMS standards when the trustee is not an independent trustee (such as a family member or beneficiary acting as trustee).

But, even in view of the above tax considerations, why not include both of the above standards in the trust document?

So as to strengthen the asset protection features, the trust can include both fully discretionary standards for an independent trustee and HEMS standards for a non-independent trustee.  This does not preclude using family members as non-independent trustees, which is generally typical.  What it does do, however, is allow the option of a fully-discretionary independent trustee if desired in the future.

One precaution.  These hybrid trust provisions cannot allow a beneficiary/trustee to flip-flop between HEMS standards and fully-discretionary standards.  Thus, if the beneficiary later resigns and appoints an independent trustee, any trustee thereafter must at all times be an independent trustee.

An independent trustee is defined in the trust document as  a trustee that is not a beneficiary and that is not “related or subordinate” to the settlor or any beneficiary within the meaning of Section 672(c) of the Internal Revenue Code.


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