Bite-Sized Bits of Knowledge

Hi, thanks for stopping by for another dose of Bite-Sized Bits of Knowledge, where we give you meaningful information in a short amount of time. Today we’re wrapping up our trust administration four-part – or five-part – videos portion of this series, and we’re going to talk about distributions. 

So, generally in trusts that we review – and we’ve reviewed a lot of of varying quality, I must say – the prevailing standard of distributions that trusts typically use is health, education, maintenance, and support. So the trustee manages the assets for the benefit of the beneficiaries and makes distributions of principle and/or income based on a standard. And that standard is usually health, education, maintenance, and support. 

It derives from an estate tax origin about inclusion of whether trustee and the beneficiaries that have both hats on should have that included in their estates. But it has found itself into all the trusts as this prevailing standard which they use. 

Now, what does that mean? Health, education, maintenance, support. We live in a very complicated time, and health, to start, has a lot of different interpretations. So, at our firm, my view of the world is that we want to minimize what I call interpretation risk. Interpretation risk. That means that your definition of health differs from mine, differs from my trustee and my beneficiaries. And when all these people have different interpretations, that creates what we call, again, court, cost, chaos, and conflict. 

And that’s not good for anyone. So in our firm, we take it a step further in our trusts, and we typically have an extra article that really fleshes out what health, education, maintenance, and support means. To you, the grantor, as the architect, I think it’s a fabulous provision. We’ve evolved it considerably over time with very smart clients that have helped us to make it better. I think that it has the significant potential to reduce those four or five Cs I mentioned: chaos, court, cost, and conflict. Four Cs. 

So the HEMS standard is good. There is some law on it, but it’s very amorphous, in my opinion. I’d rather be more clear than less clear. The more direction you give your trustees, the better. Another standard is discretionary – pure discretionary. Usually, HEMS standard is discretionary, but like I said, there’s rights there. There’s pure discretionary. I want you to make distributions of principle and/or income based on what the trustee decides in their sole discretion.

That’s possible. You can do it. It gives a lot of discretion to the trustee that you may or may not want. You could say “best interest of the beneficiaries,” “discretionary with best interest.” The point is, you can make a lot of different standards your own. 

I would recommend you’re more clear than less clear unless you just absolutely trust someone, in which case maybe that’s okay. But if that person is not the trustee, make sure you’re accommodating, of course, other trustees that you don’t trust as much or you don’t even know. 

These things can last a long time – a thousand years in Florida, for example. So you’re going to probably have a trustee you don’t know if you’re going to have a long-term trust. And so you need to be thinking forward enough to accommodate those different standards. So HEMS, discretion, best interests, whatever. 

I want to make a point to say you can also do distributions of just income for certain people, distributions of just principle for certain people. You can be very flexible with how you want to do this. For example, for spouses to qualify for the marital deduction, which is an estate tax deduction if you have a large estate, it can go in trust, but it has to have certain rules.

One of those rules is that the spouse has to get the income minimally once per year. All the income. That’s an example of where you would have a trust that says “all income to spouse.” 

If you have a lot of money, you may want to have just the income coming out – or even a part of the income that comes out. Then that provides for the beneficiary, and then while also growing the trust meaningfully, and so everybody’s happy. 

The more assets you have, the more wealth you have, the more options there is to both distribute and grow and to achieve your long-term goals. That’s all I have today on distributions. Thank you so much for stopping by, and stay tuned for more.