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When Is It Okay To Spend Trust Principle?

It is not unusual for trust beneficiaries in the Brandon, Mississippi area to reach out to the Palmer & Slay team for advice on getting more money out of a trust. Whether that is possible depends on the trust they are the beneficiary of

Some trusts are designed to give out a predetermined amount of money. Other trusts give trustees a bit of wiggle room when beneficiaries ask for more. In this blog post, we are going to go over two common provisions that control the ability of trustees to increase the amount of money paid out to beneficiaries. 

Spendthrift Provisions 

A spendthrift is someone who lets money flow through their fingers as easily as water. If they have money, they are spending it. They may also spend money they don’t have and end up drowning in debt. 

A spendthrift trust or spendthrift trust provisions protect property held in trust from spendthrift beneficiaries. 

Adding spendthrift provisions to a trust prevents the beneficiary from getting their hands on trust assets and quickly draining the available funds. Because the beneficiary cannot touch the money, the funds are also shielded from the reach of creditors. 

The trustee of a spendthrift trust has the responsibility to protect the trust’s assets. The trustee may have discretion to draw down trust money as they see fit on behalf of the beneficiary, or they may have to follow strict guidelines put in place by the trust’s creator. 

Whether the trustee can access the trust’s principle, or is restricted to spending in the trust’s income depends on the way the trust was drafted. 

Spending for HEMS – Health, Education, Maintenance & Support 

While spendthrift provisions tighten the purse strings, grantors can give trustees the discretion to let more funding flow out by stating that income and/or principal can be distributed for the beneficiary’s health, education, maintenance, and support (HEMS).

Including this “ascertainable standard” allows the trust to spend money on or for the beneficiary without the IRS ruling that the beneficiary owns or controls — and therefore must pay taxes on — the trust’s funds. This is true even if the beneficiary is also a trustee. 

Here are some examples of things that money can be spent on for HEMS:

  • Health
    • Routine health care
    • Health care costs that Medicare or Medicaid won’t cover
    • Stays in hospitals or rehabilitation centers 
    • In-home care
    • Prescription drugs and over-the-counter medication
    • Dental
    • Vision
    • Mental health
    • Gym memberships
    • Speciality foods 
  • Education
    • Tuition and room and board
    • Books and other supplies 
    • Expenses related to optional items that enhance an educational experience — like a visit to a concert or a chance to study abroad
    • Continuing education classes 
  • Maintenance and Support
    • Mortgage or rent payments
    • Property taxes
    • Utilities
    • Premiums for health, life, and property insurance
    • Assistance with cleaning, shopping, and other household tasks
    • Travel and vacation expenses if such spending was typical before the trust was made

These are just examples. A trust may include very specific language detailing what sort of HEMS spending is allowable. Or it may be totally up to the discretion of the trustee. 

Preserving Your Wealth. Protecting Your Loved Ones. 

Trusts are a powerful tool, but only if they are put to proper use. When beneficiaries or trustees have questions about trust management, Palmer & Slay’s experienced team of estate planning attorneys are here to help. Anyone in the Brandon, Mississippi area with questions about trusts should reach out.