Two Things You May Not Know About Your Trust: Power of Appointment and HEMS

You did your Estate Plan, and that plan includes a Trust. But here are two things you might not realize are part of your Trust – and they can change that entire plan in a way that could surprise you! One is called a power of appointment — a provision that can quietly redirect where your family’s assets ultimately go. The other involves what’s known as HEMS: limits on health, education, maintenance, and support that can restrict how and when you’re able to access money left to you in trust.

What Is a Power of Appointment in a Trust?

A Case in Point: The Power of Appointment

My father had his estate planning documents drafted to say the following: if Dad dies, set up a Trust for Mom for her life, and when she passes away, leave all the assets – which included several family businesses – to me, my brother, and my two sisters outright, as long as we are at least age 35.

Dad paid for all of us to go through college, and he trusted that we could handle our decisions later in life. Dad died, and his Trust was created for Mom, who has now reached her mid-90s, so we children were trying to determine which company each of us wanted to keep once we had inherited them and how we could arrange money to buy out our other siblings. However, unbeknownst to us, Mom had signed a new Will that exercised a Power of Appointment that lay buried in the language of Dad’s Trust, and by doing so, Mom diverted all the businesses and other assets into a generation-skipping Trust for her grandchildren and future generations – bypassing me, my brother, and two sisters except for distributions of income we could split each year.

Powers of appointment (POA) can be an important and effective estate planning tool in providing flexibility within estate planning documents, but they can be powerful if exercised and can dramatically change the course of an estate plan. In a typical situation the POA language is buried in the pages of a Trust document, allowing the person granted that POA the opportunity to change the flow of assets that would otherwise take place from the Trust. To exercise that POA, the person granted that power, my mother in my example above, includes a paragraph in his or her own Will referring to the POA and stating that they hereby exercise it.

So how can you figure out if this POA situation applies in your family? You need to read two documents by two different people. First, read the Trust of the older generation to see if such POA language was included in that original document. Second, read the Will of the person to whom that POA was given or allowed – maybe that is your other parent, or maybe it’s you, because that is the document in which they would be required to include language referring to that POA in order to complete the “exercise.”

Understanding HEMS: Health, Education, Maintenance, and Support

Another Case in Point: Mom’s Trust has HEMS Powers

While Dad had created his Trust before he passed away, Mom also had her own Will and a Revocable Trust document controlling money that was in her name. Mom didn’t want to show us her own Trust document – she thought it was too personal and might lead to too many questions or concerns – but she told my brother, sisters, and me that she put all the money she owned into Trusts to protect us but that “we could get at it and use it any time we wanted and that she had even made us Trustees over our own shares.” That was our understanding – until Mom passed away and we discovered that the money would stay in Trust for our entire lifetimes and that our access was limited to what were called “HEMS” powers: health, education, maintenance, and support.

HEMS language is legalese but essentially means that for typical and reasonable living expenses, we could justify having those expenses paid from our Trust. But that was very different from our expectations. It did not mean that we could get the money for any purpose at any time we chose to do so. And it certainly did not feel anything like actually owning that money ourselves—it almost felt like Mom didn’t trust us or have confidence in us, which was disappointing.

Avoiding Estate Taxes and Securing Creditor Protection

We were confused about why Mom would limit our access to the funds she left us in trust, so we asked her estate attorney for an explanation. To make sure that the money in our Trusts was protected from our having to pay estate taxes in the future and also to protect it from potential creditors should we become involved in a lawsuit, our access had to be limited in one of two ways. Either a separate trustee would have to make decisions about distributions to us, or we could be our own trustee, and our access would have to be limited to the HEMS powers (what trust law calls an “ascertainable standard” for distributions).

Since estate taxes don’t apply unless my net worth is above $15 million ($30 million since I’m married), protection from estate taxes doesn’t seem like a high family priority, even though those taxes have applied at lower levels in the past. Many families are looking for greater flexibility around trust distributions now that estate taxes are typically less of a concern. And even though HEMS restrictions also protected us from creditors because our access to the money was not entirely under our own control, was that possibility worth the tradeoff of our never having complete access?

These are two areas of estate planning—Powers of Appointment and so-called HEMS powers in Trusts—that can have a dramatic impact. Are they part of your parents’ plan? Are they part of your plan?

If provisions like these exist in your family’s trust, a conversation with Verum Partners can help clarify what they mean for your plan.

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