Common Provisions in a Revocable Living Trust And What They Actually Do
Revocable living trusts are flexible estate planning tools that can accomplish any number of goals from simple objective like avoiding probate to more complex situations involving family needs or complicated asset management.
However, a trust is just a shell. In order to actually do what you want it to do, specific provisions need to be written into the trust. Without them, the trust may not have the legal ability to accomplish what you think it does.
The real power lies in how the trust:
- Defines who gets what
- Controls when and how distributions happen
- Protects beneficiaries from themselves, creditors, or outside risks
- Adapts over time as laws and circumstances change
Below is a structured guide to the most common and important provisions you’ll see in a well-drafted revocable living trust.
Of course, a qualified attorney can walk you through each and ensure your trust is properly drafted to be consistent with current laws.
The HEMS Standard
One of the most foundational distribution standards in trust planning is known as HEMS which authorizes the trustee to distribute funds from the trust for four broad categories.
HEMS stands for:
H – Health: Generally, distributions for medical care, health insurance, or therapies are eligible
E – Education: Tuition, books, basic living costs while pursuing education
M – Maintenance: Basic living standard costs
S – Support: Ongoing expenses to keep lifestyle consistent
HEMS provides some level of trustee discretion while also preventing unrestricted access.
However, it does put the trustee in a potentially uncomfortable position as they are responsible for determining what expenses the beneficiary incurs aligns to these standards.
For example, is maintaining a $1,000 per month apartment or a $6,000 per month consistent with the maintenance or support objectives?
That is why it’s important to consider who you are naming as trustee.
Staggered Distribution Ages
Trusts are often considered when children are younger and there are concerns about them receiving a large inheritance before they are ready to handle it.
Would you trust an 18 year old with a $1,000,000 inheritance? Maybe but most parents are uncomfortable with that idea.
Staggered Distribution Ages simply set limits on how much of the inheritance is available at different ages. These can be set at nearly any amount at different ages.
One example is:
- 1/3 at 25
- 1/3 at 30
- Remaining at 35
Staggered distributions are often related to the principal of the trust and work in combination with the HEMS strategy to provide distributions for those areas.
- The assets that are controlled by the trust must be carefully planned for tax laws. Trusts with retained income are generally terribly expensive as trusts are taxed very quickly at the highest tax rates. Depending on what assets the trust maintains, this could result in a really high tax bill.
- Trusts maintained over long periods of time may incur higher costs on an annual basis for tax filing, or corporate trust management.
Spendthrift Provisions
Spendthrift Provisions add an extra layer of protection to inheritance if you have a beneficiary that you are concerned about being able to handle the inheritance well. Spendthrift provisions prevent the beneficiary:
- Assigning their interest in the trust
- Using future distributions as collateral
- Having creditors directly access trust assets
Trust Protector Provision
A trust protector is an independent third party with limited powers over the trust.
Generally, a trust protector can:
- Remove and replace trustees
- Modify trust provisions for tax law changes
- Resolve ambiguities
- Change trust situs (state jurisdiction)
This is an important provision as trusts are generally designed to span multiple years and tax regimes. Enabling this provisions allows the trust, within limits, to adapt and maintain its effectiveness.
Special Needs Provisions
If a beneficiary has a disability, trusts can include special needs language to preserve eligibility for government benefits and continue to provide supplemental support.
Without this provision, an inheritance can disqualify the beneficiary from critical assistance programs