The Limits Of Discretion: Trust Distributions For Health, Education, Maintenance And Support

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:

Health

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...