Aaron Charles Gregg

What Is the HEMS Standard?

“The ‘HEMS’ (health, education, maintenance, support) standard in estate planning is used to guide trustees in how/when they should release funds to a beneficiary.”

The HEMS standard is used to inform trustees as to how and when funds should be released to a beneficiary, according to a recent article from Yahoo! News, “What is the HEMS Standard in Estate Planning.” Using HEMS language in a trust gives the trustee more control over how assets are distributed and spent. If a beneficiary is young and not financial savvy, this becomes extremely important to protecting both the beneficiary and the assets in the trust. Your estate planning attorney can set up a trust to include this feature.

When a trust includes HEMS language, the assets may only be used for specific needs. Health, education or living expenses can include college tuition, mortgage, and rent payments, medical care and health insurance premiums.

Medical treatment may include eye exams, dental care, health insurance, prescription drugs and some elective procedures.

Education may include college housing, tuition, technology needed for college, studying abroad and career training.

Maintenance and Support includes reasonable comforts, like paying for a gym membership, vacations and gifts for family members.

The HEMS language provides guidance for the trustee. However, ultimately the trustee is vested with the discretionary power to decide whether the assets are being used according to the directions of the trust.

Sometimes beneficiary requests are straightforward, like college tuition or health insurance bills. However, maintenance and support need to be considered in the context of the family’s wealth. If the family and the beneficiary are used to a lifestyle that includes three or four luxurious vacations every year, a request for funds used for a ski trip to Spain may not be out of line. For another family and trust, this would be a ludicrous request.

Having HEMS language in the trust limits distribution. It has greater value, if the trustee is also a beneficiary, lessening the chances of the trust diminishing for non-essentials or to fund a lavish lifestyle.

Giving the trustee HEMS language narrows their discretionary authority enough to help them do a better job of managing assets and may limit challenges by beneficiaries.

HEMS language can be as broad or narrow as the grantor wishes. Just as a trust is crafted to meet the specific directions of the grantor for beneficiaries, the HEMS language can be created to establish a trust where the assets may only be used to pay for college tuition or career training.

Reference: Yahoo! News (Jan. 7, 2022) “What is the HEMS Standard in Estate Planning”

What Happens to an HSA when Owner Dies?

“Do you know what happens to your HSA after you die? Health savings accounts, called HSAs for short, function differently than most other kinds of accounts.”

An HSA, or Health Savings Account, can be an excellent way to save for medical expenses. For wage earners with high-deductible HSA-eligible health insurance plans, the IRS allows generous contributions on a pre-tax basis to an HSA ($3,600 per year for individuals, $7,200 per year for a family plan as of 2021), according to the article “HSAs and Estate Planning” from The Street. The money can be withdrawn, including both principal and earnings, with no taxes, as long as the withdrawals are used for qualified medical expenses.

Seems like a no brainer, doesn’t it? This unique account allows for triple-tax savings. However, when HSAs become large, savvy planning is needed to understand how they work in estate planning and taxes. Here’s a look at what happens to an HSA when the owner passes.

The inherited HSA becomes the surviving spouse’s HSA, if the spouse had been designated as the beneficiary on the HSA. The money remains in the HSA and the spouse’s name is added to the account. They may make tax-free distributions from the HSA to pay for their own qualified medical expenses, as if they were the original owner. The HSA is not included in the estate, since it has become the property of the surviving spouse.

What if a non-spouse is the designated beneficiary? Upon the death of the original owner, the HSA is no longer considered an HSA for tax purposes. An immediate and taxable distribution of the entire amount goes to the non-spouse beneficiary. The beneficiary must include the HSA balance in their taxable income in the year of the original owner’s death.

The normal 20% penalty applying to distributions for non-qualified medical expenses doesn’t apply.  The beneficiary pays income taxes at their marginal tax rate on the full amount of the HSA balance.  However, at least there are no penalties.

However, any portion of an inherited HSA balance used to pay for outstanding medical expenses of the account owner within one year of the date of death (DOD) is not taxable to the non-spouse beneficiary. In this case, the HSA is also not included in the estate, since it is fully taxed to the non-spouse beneficiary on their own individual tax return.

If the HSA owner designates their estate as the beneficiary, the account balance is included in the owner’s gross income for the year of their death. The HSA is still not included in the estate and is treated as income for the last year of their life, when it is reported as income on the final tax return.

A charity may be listed as a beneficiary for a has. Any charity will receive the full amount of the HSA with no taxes or penalties.

For most people, it’s best to use the HSA as you need it. Once you reach age 65, you are no longer subject to the 20% penalty for withdrawals not spent on medical expenses. If you have a sizable HSA, talk with your estate planning attorney on how to efficiently use it, while living and for other beneficiaries after you have died.

Reference: The Street (Dec. 9, 2021) “HSAs and Estate Planning”

Are You Ready for The “Boomer Tsunami”?

Did you realize that in 20 years, there’ll be three times as many 85-plus year olds around town? If you look at the number of baby boomers (those born between 1946 and 1964) and the increasing lifespan of the population in general, it’s going to be a fact, as reported by the Cleveland Jewish News in “Boomers should prepare for future today.”

With those kinds of population figures, the baby boomers will have tremendous social and health care needs. Despite all of the fantastic healthy diet plans and fitness regimens, only 21% of boomers exercise regularly, and 73% of men and 60% of women are overweight. There will also be one person in five who will suffer from dementia and 50% anticipate that they will need to work in their “retirement.” Shockingly, 31% have saved nothing and 45% will have a mortgage past the age of 60.

When President Johnson signed Medicare and Social Security into law in the 1960s, there were 27 workers in the workforce for every “retiree” age 65 or over, and the average lifespan was 69 years of age. The average benefits were collected for four years.

There are now seven workers for every person over 65, collecting benefits for 15 years on average, until they reach the age of 80. Fast-forward 20 years and there will only be two workers for every 65-plus-year-old and they’ll collect for 25 years to age 90.

You can easily see that our current government programs can’t continue to provide the benefits they have in the past. We’ll either have to wait until we’re much older to collect—or the benefits will have to be decreased or cut off, depending on income.

We’re all going to have to try to stay healthy and plan better for the future. That means that we should maximize our retirement savings and consider long-term care insurance, along with other estate planning strategies to help defray the cost of our very long-term needs.

These are important, immediate issues that require serious thought, planning, and financial support. Make sure that you’ll be ready for the “Boomer Tsunami.”

Reference: Cleveland Jewish News (November 9, 2016) “Boomers should prepare for future today”

Baby Boomer Estate Planning Lessons for Wills, Funerals and Health Care Expenses

The website, A Place for Mom, recently posted "Poor Estate Planning Lessons Inherited by Baby Boomers" that has some lessons for all of us to heed when we think about our estate planning.

Wills. The long-term consequences of not having a will are huge. Your assets will go to probate, which can leave your family with huge expenses that will eat away at your wealth. Many folks don't have a will—even though they know they should. It should come as no surprise that many baby boomers are stuck dealing with an estate without a will. This has encouraged many baby boomers to invest their time in making sure that their own children are better prepared. An outdated will can also cause major issues for a family. If you have been divorced or recently widowed and remarried, it is crucial to reflect those changes in your will. Think it would go over well if your estate is left to your ex?

Funerals. If funds are tied up in probate or otherwise inaccessible for funeral planning, it can create considerable stress and a financial burden. In theory, an entire inherited estate can be used to pay for the funeral, but you should have liquid assets available for the funeral. More baby boomers are opting to pre-pay for their funerals or to set up an account designated to use for funeral expenses. US News says that about 23% of people over 50 have prepaid for at least some of the funeral or burial expenses for themselves or someone else.

Healthcare Costs. Unexpected healthcare costs can put a major dent in a retirement plan. Baby boomers need to have early conversations to determine if their parents have included health care costs in their retirement planning. And they shouldn't neglect health care costs in their own retirement plans. People often fail to add these expenses into their long-term retirement planning. You should know your health care costs and account for them into your long-term strategy. In order to plan for health care expenses, you should consider the following:

• Current healthcare expenses
• Details and coverage of each plan
• Plan providers
• Insurance details
• Prescription costs
• Doctor fees
• Current budgets and budget adjustments required for the future

If there are health concerns now, be sure you plan for them long-term. Baby boomers are learning the hard way that it's important to plan for the worst and hope for the best. Trying to find health information in a crisis is stressful. Having family planning meetings and going over all of the possibilities will help when the time comes to deal with these issues.

If you have experienced the loss of a parent, you already know first-hand the importance of strong estate planning and the benefits to surviving family members. Learn from poorly planned estates and implement better planning for yourself and those you love.