Question:
My sisters and I would liked to sell part of a piece of land worth $15 million or more held in trust. We learned we couldn’t get the money out of the trust thru distributions so we are not going to sell. Very disappointing. Our trustee says the maximum we can each get annually is around $150,000, via HEMS. We four are in our 60s. The trust was created in the 1970s. Mom is 87, still kicking but not great. She’s also a beneficiary. Until she dies, and the trust dissolves naturally, trustee says no huge distributions of corpus are possible. Is that true? What’s considered extravagant, and relative in today’s economy? (For instance, consider this case out of Colorado (Matter of Estate of McCart, 847 P.2d 184 (Colo. Ct. App. 1992)) https://unsworthlaplante.com/blog/general/hems-standards-estate-planning/. )
It seems to me the trust has certainly outlived its purpose, and the value of land in it was never anticipated 50+ years down the road.
Response:
Every trust is different and the trustee must follow the provisions of the particular trust. The so-called HEMS standard is an artifact of tax law, which permits a trustee to make distributions to himself or herself only for his or her “health, education, maintenance and support” without the trust being in his or her taxable estate. But it has become standard language and is often found in trusts where it is unnecessary and can be accompanied by other language which could modify its effect, which was true in the case you cite.
For instance, the trust may say that the trustee may provide for the beneficiary’s health, education maintenance or support or must provide the same. Depending on which word is used, the outcome could be very different for the beneficiaries.
In addition, what’s needed for those purposes can be in the eye of the beholder with different beholders, or trustees, who may have very different opinions on the matter. The deciding factor in the case you cite appears to be the provision that the beneficiaries be “[maintained] in the social and economic positions” in which they were in when the trust was created, which the court interpreted to require liberal distributions.
That said, it’s become easier in recent years to modify irrevocable trusts. In effect, they’re no longer so irrevocable if all the beneficiaries are in agreement about the proposed change. The difficulties is getting all the “beneficiaries” on board since the term includes future beneficiaries as well as current ones. For instance, it sounds like your mother, your siblings and you are the current beneficiaries. But the trust may provide for your children or grandchildren if any of you do not survive your mother. They need to be included in the decision as well and may have an interest in preserving the trust assets.
Under the uniform trust code, which is a bit different from state to state, if everyone’s on board you may be able to modify the trust or decant it to a new trust that better meets your current needs. This might occur through a reformation in court, a nonjudicial settlement agreement — often referred to by it’s initials, “NJSA” — or “decanting” the trust assets to a new trust with updated terms.
I’d recommend consulting with an estate planning attorney in your state to see if this might be an option.
