Understanding What Your Children Cannot Use Their Inheritance For
When parents think about leaving a significant inheritance to their children, they often face a fundamental dilemma.
You want your children to benefit from the money.
You want them to have excellent healthcare. You want them to be able to attend college or graduate school. You want them to own a comfortable home, raise their families, and maintain a reasonable standard of living.
But you may not want to hand them a large inheritance outright and effectively say:
“Here is the money. Do whatever you want with it.”
That is one reason parents use trusts containing a HEMS distribution standard.
HEMS stands for:
Health
Education
Maintenance
Support
Instead of giving a child unrestricted access to an inheritance, the trust can provide that distributions are limited to these purposes.
But that raises an equally important question:
What CAN’T my children do with money in a HEMS trust?
The answer helps explain why HEMS trusts can be so attractive for families trying to preserve substantial wealth across generations.
The key concept is that HEMS isn’t supposed to be another way of saying, “anything that makes the beneficiary happy.”
In fact, Treasury regulations specifically distinguish an ascertainable standard based on health, education, maintenance and support from a broader power to spend money for a beneficiary’s general “comfort, welfare, or happiness.” The regulations also make clear that maintenance and support are not restricted to bare necessities; an accustomed manner of living can matter.
That distinction is critical.
Let’s look at what it means in the real world.
First, What Can a HEMS Trust Generally Pay For?
Before looking at what is prohibited, it helps to understand what normally falls on the HEMS side of the line.
Depending upon the language of the particular trust, HEMS can potentially cover expenses such as:
- Doctors and hospitals
- Dental and vision care
- Health insurance
- Medical treatment
- College tuition
- Graduate and professional school
- Books and educational expenses
- Housing
- Mortgage or rent
- Property taxes
- Utilities
- Food
- Clothing
- Transportation
- Insurance
- Other expenses associated with maintaining the beneficiary’s accustomed standard of living
Federal regulations expressly recognize standards including health, medical and dental expenses, college and professional education, and support in one’s accustomed manner of living.
That last concept is particularly important.
HEMS does not necessarily require your child to live cheaply.
A HEMS trust holding several million dollars isn’t necessarily limited to paying for groceries, generic clothing and a studio apartment.
The regulations state that “support” and “maintenance” aren’t limited to the bare necessities of life.
But HEMS also doesn’t necessarily give your child an unlimited license to convert the trust into a personal checking account.
That is where the restrictions become important.
1. They Generally Can’t Simply Empty the Trust
Perhaps the most important limitation is the simplest one.
If you leave your child $5 million outright, the child generally controls $5 million.
If instead you leave $5 million in a properly drafted HEMS trust, your child does not necessarily have the right to demand the entire $5 million.
That’s a major distinction.
Your child can’t simply walk into the trustee’s office and say:
“It’s my inheritance. Wire the entire balance to my checking account.”
If distributions are limited to HEMS, the trustee’s authority is governed by that standard and the actual language of the trust.
That is precisely the point.
The trust owns the assets.
Your child is the beneficiary.
Those are two very different things.
2. They Generally Can’t Take Money Out Just to Become Personally Wealthier
Suppose your daughter has $5 million sitting in her HEMS trust.
She already has sufficient income to live comfortably.
She tells the trustee:
“Give me $2 million. I don’t need it for anything right now. I just want it in my personal brokerage account.”
That can present a serious HEMS problem.
Simply transferring assets from the trust into the beneficiary’s personal estate isn’t automatically health, education, maintenance or support.
Guidance discussing HEMS commonly distinguishes legitimate support from distributions whose purpose is merely enlarging the beneficiary’s personal estate.
That distinction can be enormously important.
One of the reasons you may have established the trust in the first place was to keep the inheritance in trust.
3. They Generally Can’t Use the Trust as an Unlimited Gift Fund
Suppose your son wants $100,000 from his HEMS trust.
But the money isn’t for him.
He wants to give:
- $50,000 to his girlfriend;
- $25,000 to his best friend; and
- $25,000 to another relative.
That is very different from asking the trust to pay his mortgage.
HEMS focuses on the beneficiary’s health, education, maintenance and support.
Extraordinary gifts to other people therefore can fall outside HEMS.
The same issue can arise when a beneficiary wants to use trust money to make large charitable gifts.
That doesn’t necessarily mean charitable giving can never be incorporated into a family’s trust planning. The trust can be drafted to address charitable objectives or other powers separately.
But a beneficiary shouldn’t assume:
“I’m allowed to receive money for my support, therefore I’m allowed to withdraw $500,000 and give it away.”
Those are different things.
4. They Generally Can’t Demand Money to Start a Speculative Business
This one surprises people.
Suppose your son comes to the trustee and says:
“I have an amazing idea for a startup. Give me $750,000 from my trust so I can launch it.”
Starting a business isn’t automatically health, education, maintenance or support.
It may be a wonderful idea.
It may ultimately make your child wealthy.
But that doesn’t transform venture capital into a HEMS expense.
Sources discussing the standard commonly identify speculative business investments as an example of something that can fall outside HEMS.
If you want your children to have access to trust capital for entrepreneurship, you can discuss that objective with the attorney drafting the trust.
For example, the trust might separately authorize certain loans or investments.
But that is different from relying solely upon HEMS.
5. They Generally Can’t Use It as a Speculation or Gambling Account
Imagine your child says:
“I want $300,000 because I have a can’t-miss investment.”
Maybe it’s:
- a highly speculative stock;
- cryptocurrency;
- an investment in a friend’s startup;
- a risky real-estate deal; or
- something closer to gambling than investing.
The fact that an investment might eventually generate money for the beneficiary doesn’t automatically make the initial distribution “maintenance” or “support.”
Speculative investments are commonly identified as falling outside the ordinary HEMS categories.
Again, a trust can be drafted with investment provisions.
But HEMS shouldn’t be confused with a blank check for personal speculation.
6. They Can’t Necessarily Buy Any Car They Want
Transportation can absolutely be part of support.
But that doesn’t mean every automobile qualifies.
Suppose your daughter needs a replacement vehicle.
Paying for an appropriate vehicle may be entirely consistent with maintaining her standard of living.
But imagine she normally drives a $60,000 SUV and asks the trust for $400,000 to buy an exotic sports car.
Now the question becomes very different.
Fidelity gives a similar example: replacing a broken-down car may be appropriate, while upgrading from a practical vehicle to an extravagant sports car may not be.
HEMS isn’t necessarily about whether an expense is “expensive.”
The more important question can be whether the distribution represents support consistent with the beneficiary’s circumstances and accustomed lifestyle—or simply a dramatic lifestyle upgrade.
7. They Can’t Necessarily Buy a Mansion
Housing is one of the clearest examples of maintenance and support.
A trust might appropriately pay:
- rent;
- mortgage expenses;
- property taxes;
- insurance;
- repairs;
- utilities; and
- other reasonable housing costs.
But that doesn’t necessarily mean a beneficiary can demand an unlimited amount for a house.
Suppose your son has historically lived in a $750,000 home.
He then asks his trustee for $4 million to purchase a waterfront mansion because:
“There’s plenty of money in my trust.”
The trustee may have to determine whether that purchase represents maintaining the beneficiary’s accustomed manner of living or substantially increasing it.
HEMS can support a beneficiary in reasonable comfort and in an accustomed manner of living. But it isn’t synonymous with unlimited lifestyle expansion.
8. They Can’t Necessarily Buy a Second or Third Vacation Home
The same reasoning can apply to vacation properties.
If owning a particular vacation residence has historically been part of the family’s or beneficiary’s established lifestyle, the analysis may be different.
But imagine a child who has never owned a vacation property demands:
$1.5 million for a beach house because it would make me happy.
“Happiness” is exactly the kind of open-ended standard that federal regulations distinguish from HEMS.
A second home isn’t automatically prohibited.
Nor is it automatically permitted.
Context matters.
9. They Can’t Necessarily Take Unlimited Luxury Vacations
This is another area where people sometimes misunderstand HEMS.
Vacations aren’t necessarily forbidden.
Remember, maintenance and support aren’t limited to bare necessities.
If a family traditionally took reasonable vacations, continuing that lifestyle may potentially fit within support or maintenance.
But there is a difference between:
“Our family normally takes a two-week vacation every summer.”
and:
“I want the trust to pay $500,000 for a year-long trip around the world.”
Fidelity uses essentially this distinction: a week or two of vacation consistent with customary spending might be appropriate, whereas a 12-month world tour likely would not be.
So the rule isn’t:
No vacations.
It’s closer to:
HEMS isn’t an unlimited luxury-travel account.
10. They Can’t Necessarily Buy a Yacht, Private Jet or Other Extreme Luxury
Suppose your child inherits a $10 million HEMS trust.
Can the child demand $2 million for a yacht?
Not merely because the trust can afford it.
Can the child demand money for a private jet?
Again, not merely because there is enough money.
The trust’s size alone doesn’t determine whether an expense qualifies.
A luxury item might conceivably fit an extraordinary beneficiary’s established standard of living under particular trust language and circumstances. But expensive discretionary purchases that dramatically increase a beneficiary’s lifestyle are much harder to characterize as ordinary maintenance or support.
Estate-planning commentary frequently uses yachts and similar luxury purchases to illustrate where HEMS becomes questionable.
11. They Can’t Simply Say, “This Makes Me Happy”
This may be the easiest way to understand the entire concept.
Imagine your child tells the trustee:
“Spending this money will make me happy.”
That’s not enough.
The Treasury regulations specifically say that a power to use trust property for the beneficiary’s “comfort, welfare, or happiness” is not limited by the required ascertainable standard.
That doesn’t mean a HEMS distribution can’t make your child happy.
Hopefully it does.
It means happiness itself isn’t the measuring stick.
The trustee needs to connect the distribution to the governing trust standard.
12. They Can’t Automatically Use HEMS as a 5% Annual Allowance
This is especially important because HEMS is sometimes confused with a 5-and-5 withdrawal power.
They are not the same thing.
If your child’s trust contains $5 million, 5% is:
$250,000.
But that doesn’t mean a HEMS provision automatically gives your child the right to withdraw $250,000 every year.
A HEMS standard governs distributions for health, education, maintenance and support.
A 5-and-5 power is a different estate-planning concept involving a power of appointment and the special federal tax treatment of the lapse of that power.
A trust could potentially contain both provisions.
But simply having HEMS doesn’t create an automatic annual 5% withdrawal right.
13. They Can’t Necessarily Give Their Spouse the Money
Parents frequently worry about what happens to an inheritance if a child later divorces.
A HEMS trust doesn’t magically solve every divorce or creditor problem, and state law matters enormously.
But keeping inherited assets in trust can be very different from distributing them outright to a child.
If your daughter has $4 million in her trust and decides:
“Give me the $4 million so I can put it into a joint account with my husband,”
a HEMS limitation may prevent her from simply demanding that distribution.
Likewise, she generally shouldn’t assume she can withdraw enormous amounts solely for the purpose of gifting them to her spouse.
Again, this is one of the reasons parents use trusts:
The money can benefit the child without necessarily becoming unrestricted personal property.
14. They Can’t Treat the Trustee Like an ATM
Perhaps the biggest misconception about a HEMS trust is that the trustee is merely there to process withdrawal requests.
That’s not the trustee’s job.
The trustee has to administer the trust according to its terms and applicable fiduciary law.
That means a request can potentially be denied.
A trustee may also need documentation explaining the purpose of a requested distribution.
For example:
$40,000 for tuition?
Easy to document.
$25,000 for dental work?
Easy to document.
Money for ordinary housing expenses?
Potentially straightforward.
$600,000 because “I want it”?
Very different question.
HEMS Is Not Supposed to Make Your Children Poor
After reading all these restrictions, a parent might conclude:
“So I’m creating a trust that forces my children to live on the bare minimum?”
No.
That isn’t what the federal HEMS standard requires.
Treasury regulations expressly state that maintenance and support aren’t restricted to the bare necessities of life. They recognize standards such as “support in reasonable comfort” and “support in his accustomed manner of living.”
That means a properly drafted trust can potentially allow your children to live extremely well.
They may be able to:
Live in a nice home.
Drive appropriate cars.
Take reasonable vacations.
Send their children to good schools.
Attend graduate or professional school.
Receive excellent healthcare.
Maintain insurance.
Pay normal household expenses.
Maintain the lifestyle contemplated by the trust.
What they don’t necessarily receive is unrestricted ownership of the trust’s principal.
And for many parents, that is exactly the point.
The $5 Million Example
Suppose you have two children and leave each child a $5 million HEMS trust.
Your son doesn’t necessarily wake up the day after you die owning $5 million personally.
Instead, he becomes the beneficiary of a trust holding $5 million.
That trust could potentially help him:
- buy or maintain an appropriate home;
- pay healthcare expenses;
- obtain additional education;
- pay ordinary living expenses;
- maintain transportation;
- support his family; and
- continue an appropriate standard of living.
But he may not be able to simply demand:
$1 million to put into his checking account.
$500,000 to give to a girlfriend.
$750,000 for a speculative startup.
$2 million for a yacht.
$1 million for speculative investments.
The entire $5 million because he’d rather own it outright.
That distinction is the heart of the strategy.
Why Would a Parent Want These Restrictions?
Because an inheritance can last much longer when there are sensible guardrails around it.
Imagine leaving a 30-year-old child $5 million outright.
That child suddenly has complete control over the money.
The child could potentially:
- spend it;
- invest it poorly;
- give it away;
- commingle it with other assets;
- make enormous speculative investments;
- dramatically inflate his or her lifestyle; or
- simply burn through the inheritance.
A trust can change the equation.
Instead of asking:
“At what age should my child receive my money?”
you can ask:
“Why does my child ever need to receive all of it outright?”
The trust can potentially provide substantial benefits throughout your child’s lifetime without requiring the entire inheritance to become unrestricted personal property.
The Trustee Matters
HEMS isn’t a mechanical formula.
There isn’t an IRS chart saying:
House: $800,000 maximum.
Car: $75,000 maximum.
Vacation: $15,000 maximum.
The standard is contextual.
The beneficiary’s accustomed lifestyle, the language of the trust, applicable state law, other circumstances and the trustee’s fiduciary responsibilities can all matter.
That’s why choosing the trustee—and carefully drafting the distribution provisions—is so important.
A $150,000 automobile could be an extraordinary lifestyle upgrade for one beneficiary and entirely consistent with another beneficiary’s established standard of living.
Likewise, a $50,000 vacation could be extraordinary in one family and completely routine in another.
HEMS isn’t necessarily about whether something is expensive.
It’s about whether the distribution falls within the standard you established.
You Can Give Your Children More Flexibility If You Want To
A HEMS trust also doesn’t have to be the entire estate plan.
If you want your children to have additional powers, your estate-planning attorney can discuss ways of building those into the trust.
Depending upon your objectives, a trust might contain provisions addressing:
- HEMS distributions;
- withdrawal rights;
- powers of appointment;
- business investments;
- loans;
- home purchases;
- charitable giving;
- distributions at specified ages;
- independent trustee discretion; or
- distributions for purposes beyond HEMS.
The important point is to make those decisions intentionally.
Don’t assume HEMS means “my kids can do anything.”
And don’t assume HEMS means “my kids can barely spend anything.”
Neither description is accurate.
The Question Every Parent Should Ask
When you’re deciding how to leave an inheritance, don’t just ask:
“How much should I leave my children?”
Ask:
“What do I want this money to accomplish for my children?”
Do you want it to provide security?
Education?
Healthcare?
A home?
A comfortable lifestyle?
Protection from disastrous financial decisions?
An inheritance for grandchildren?
Long-term family wealth?
If those are your goals, handing a child a multimillion-dollar check may not be the only—or necessarily the best—way to accomplish them.
A properly drafted trust can potentially allow your child to benefit from wealth without giving the child unrestricted access to every dollar of that wealth.
That is one of the most important distinctions in estate planning.
The Bottom Line
HEMS stands for Health, Education, Maintenance and Support.
It can be a broad standard. It isn’t limited to keeping your children alive or paying only their most basic expenses. Federal regulations expressly recognize support in reasonable comfort and an accustomed manner of living.
But HEMS also isn’t supposed to mean:
“Whatever my child wants.”
Depending on the trust and circumstances, HEMS may restrict a beneficiary from using trust assets simply to make extraordinary gifts, accumulate assets personally, fund speculative ventures, dramatically increase his or her lifestyle, or purchase extravagant luxuries unrelated to the beneficiary’s health, education, maintenance or support.
That’s precisely why the structure can be valuable.
Your children can potentially enjoy the benefits of the inheritance for decades while the trust continues to hold and protect the underlying family wealth.
And sometimes the most important part of an estate plan isn’t deciding what your children can do with their inheritance.
It’s deciding what they can’t.
This article is for general educational purposes only and does not constitute legal, tax, or financial advice. HEMS provisions vary based on the language of the trust and applicable state law. Anyone establishing or administering a trust should consult qualified estate-planning and tax counsel.
