Serving as a trustee is a significant responsibility that requires careful judgment, disciplined decision-making, and adherence to fiduciary standards. Trustees are entrusted with managing assets on behalf of beneficiaries and must balance legal obligations, the intent of the grantor, and the evolving needs of those beneficiaries.
This article outlines the core duties of a trustee and provides a practical framework for thinking about discretionary distributions, particularly under the commonly used “health, education, maintenance, and support” (HEMS) standard.
The Role of a Trustee
At its core, a trustee is responsible for administering trust assets for the benefit of current and future beneficiaries. These responsibilities are defined by three primary sources:
- The trust document
- State law and fiduciary principles
- The grantor’s intent, to the extent that intent can be understood from the trust document itself
Trustees owe duties not only to current beneficiaries, but also to remainder and contingent beneficiaries, often requiring careful balancing across multiple interests.
Core Fiduciary Duties
While the specifics may vary by jurisdiction and trust language, several foundational duties consistently apply. Ultimately, the trustee is accountable to the beneficiaries, including those who will benefit in the future. If beneficiaries believe the trustee has failed to act properly, they have the right to challenge the trustee’s actions.
Duty of Loyalty
Trustees must act solely in the interests of the beneficiaries and avoid conflicts of interest or self-dealing.
Duty of Prudence
Trustees are expected to act with reasonable care, skill, and caution, particularly when making investment and distribution decisions.
Duty of Impartiality
When there are multiple beneficiaries (e.g., current and remainder), trustees must balance competing interests fairly and without favoritism. That said, the trust document itself can change or remove certain duties. For example, a trust may allow the trustee to favor a current beneficiary over those who will benefit later, or to prioritize one group of beneficiaries over another. When the document expressly permits this, the trustee is generally protected when acting within those terms.
Duty to Administer According to the Trust
Trustees must follow the terms of the trust document and seek guidance when interpretation is unclear.
Duty to Inform and Account
Beneficiaries are generally entitled to information about the trust, including accountings and updates on administration.
Duty to Preserve and Protect Assets
Trustees must safeguard trust property, maintain proper records, and ensure assets are appropriately managed and insured.
Duty to Act Personally (and Delegate Appropriately)
While trustees may engage advisors, they remain ultimately responsible for decisions and oversight. A trustee may also use trust funds to purchase insurance that covers the trustee against claims related to trust administration, and to hire an attorney when legal questions arise. Both are reasonable steps a trustee can take to protect themselves.
Understanding Discretionary Distributions
Many trusts grant trustees discretion to make distributions for a beneficiary’s health, education, maintenance, and support (HEMS). This is known as an ascertainable standard under tax law and provides both flexibility and structure.
Some trusts grant the trustee broader discretion in addition to or in place of HEMS, permitting distributions for a beneficiary’s “comfort and welfare,” “happiness,” “best interests,” or even “any purpose.” These broader standards provide greater flexibility, but they may also involve different tax and creditor-protection considerations. Identifying the distribution standard used in a particular trust is therefore an important starting point for any distribution decision.
HEMS can also offer a practical tax advantage. When a trust limits distributions to health, education, maintenance, and support, a beneficiary may generally serve as trustee of their own trust without causing the trust assets to be treated as under the beneficiary’s control for estate or gift tax purposes.
What Does HEMS Mean in Practice?
While each trust is unique, the HEMS standard has been shaped by legal precedent and generally includes:
Health
Expenses related to physical and mental well-being, such as:
- Medical care, insurance, and treatments
- Mental health services and rehabilitation
- Health-related home modifications or services
- In some cases, elective procedures depending on context
Education
Often interpreted broadly, including:
- Tuition (primary through higher education)
- Books, supplies, and living expenses
- Tutoring, extracurriculars, and study abroad
- In some cases, graduate or professional education depending on intent
Maintenance and Support
The most flexible category, generally tied to maintaining a beneficiary’s standard of living, including:
- Housing, utilities, and transportation
- Insurance and taxes
- Vacations and lifestyle expenses consistent with prior patterns
- Support for family members or dependents
Importantly, this standard is not limited to basic necessities, and it is often interpreted in the context of the beneficiary’s accustomed lifestyle.
A Framework for Making Distribution Decisions
Even with broad discretion, trustees should follow a thoughtful and consistent decision-making process.
1. Start with the Trust Document
The trust’s language, as well as the grantor’s intent as understood from the trust document should always guide decisions. Some trusts include specific instructions or emphasize particular beneficiaries or outcomes.
State law also plays an important role. Each state has its own rules about how trusts are administered, and those rules may fill in gaps where the trust document does not speak to a particular situation. Trustees should understand which state’s law governs the trust and be aware of any default rules that may apply.
2. Consider the Tax Implications
Tax considerations are also an important part of the distribution analysis. A trustee should consider the tax status of the trust, including whether it is a grantor or non-grantor trust and whether it is GST-exempt. In the case of a non-grantor trust, it may make sense to distribute income to a beneficiary in a lower tax bracket rather than accumulate it in the trust, where income may be taxed at higher rates.
The timing and type of distribution can also affect the tax result. GST tax considerations are especially important when distributions are made to skip persons, such as grandchildren or more remote descendants. A trustee should also consider whether distributing GST-exempt assets before non-exempt assets could reduce future transfer tax benefits. These tax issues should be evaluated alongside the trust terms, fiduciary duties, beneficiary needs, and overall purpose of the trust.
3. Consider the Beneficiary’s Needs and Circumstances
A trustee should consider the beneficiary’s needs and circumstances, including the beneficiary’s age, health, life stage, current and future financial needs, lifestyle, and prior standard of living.
4. Evaluate the Size and Purpose of the Trust
A distribution that may be reasonable in one trust could be inappropriate in another depending on the trust’s expected longevity, the number of beneficiaries, and whether the trust is intended for long-term preservation, current support, or another purpose.
5. Assess Other Available Resources
Depending on the trust and applicable law, trustees may consider personal assets or income, other trust distributions, and outside financial support. While there is no universal rule, and some frameworks require consideration of outside resources while others do not, these resources are often relevant in determining whether a distribution is reasonable.
6. Maintain Consistency and Process
Well-documented, consistent decision-making helps align distributions with the trust’s intent, provide clarity to beneficiaries, and reduce the risk of disputes or claims of unfairness
Structuring Distributions in Practice
In administering trusts, trustees often adopt practical approaches to balance flexibility and discipline. Common frameworks include:
- Regular distributions to support ongoing living expenses
- Event-based distributions tied to milestones (e.g., education, career progress)
- On-request distributions, evaluated case-by-case within the trust’s framework
Each approach can be appropriate depending on the trust’s purpose and the beneficiary’s circumstances.
Balancing Competing Interests
One of the most challenging aspects of serving as a trustee is balancing the needs of:
- Current beneficiaries (who may seek distributions today)
- Remainder beneficiaries (who depend on long-term preservation)
This tension underscores the importance of:
- Acting impartially
- Considering long-term consequences
- Anchoring decisions in the trust’s purpose and intent
Exercising Discretion Thoughtfully
Courts generally will not second-guess a trustee’s decision if it is made:
- In good faith
- With proper consideration of relevant factors
- Without conflicts of interest
However, decisions that are arbitrary, self-interested, or inconsistent with the trust’s purpose may be challenged.
Risks of Failing to Adhere to the Distribution Standard
When a trustee makes distributions or administers the trust in a manner that falls outside what the trust and state law allows, there can be real consequences. The consequences depend on the situation and who is serving as trustee:
- Lawsuits by beneficiaries. Any beneficiary, including those who will benefit in the future, can sue a trustee who makes distributions that do not follow the trust’s terms and applicable fiduciary standards. If a court agrees, the trustee may be required to pay damages, return fees they were paid, and/or be removed.
- Estate tax exposure. If a beneficiary is also serving as trustee and makes distributions beyond what HEMS allows, the IRS may treat that broader control as ownership for estate tax purposes. This could cause the trust assets to be included in the beneficiary’s taxable estate.
- Loss of creditor protection. Many trusts are structured to keep assets out of reach of a beneficiary’s creditors. Distributions that go beyond what the trust allows can undermine that protection, potentially exposing assets to claims that the grantor intended to shield against.
Final Thoughts
Effective trusteeship requires more than technical compliance. It calls for judgment, discipline, and a deep understanding of the trust’s purpose.
By grounding decisions in fiduciary principles, carefully interpreting the HEMS standard, and applying a consistent framework, trustees can:
- Honor the grantor’s intent
- Support beneficiaries appropriately
- Preserve trust assets for future generations