The term Ascertainable Standards apply to the distribution of trust assets to a beneficiary of a trust. To learn how they work and why they are important, please read on. At the Elder and Estate Planning Law Firm of St. Louis, we work with these concepts every day, and we can help you.
Understanding Ascertainable Standards in Trusts and Estate Planning
In estate planning, the powers granted to a trustee can vary significantly depending on how the trust is drafted. Some trustees are given full discretion over distributions, meaning they decide if, when, and how much to distribute to beneficiaries. Other trusts impose mandatory requirements—such as distributing all income annually or making required minimum distributions (RMDs) from retirement accounts. In some cases, beneficiaries are granted withdrawal rights they can exercise directly.
However, many trusts fall somewhere in between full discretion and strict mandates. These trusts often rely on ascertainable standards—commonly defined as distributions for a beneficiary’s health, education, maintenance, or support (HEMS). When a trust includes such standards, the trustee may only make distributions that meet these specific criteria. If the standard is satisfied, and the trust requires a distribution, a beneficiary may have the right to compel it. Some trusts further require beneficiaries to first exhaust their own resources before requesting a distribution under an ascertainable standard.
Why Use Ascertainable Standards in Estate Planning?
Ascertainable standards serve several critical functions in trust design, particularly in the areas of asset protection, tax planning, and income tax treatment.
- Asset Protection
By limiting a trustee’s power—especially when the trustee is also a beneficiary—through ascertainable standards like HEMS, grantors can shield trust assets from creditors. This structure allows beneficiaries to serve as trustees of their own trusts without exposing trust assets to personal liability. Without such limitations, beneficiaries would likely need to appoint third-party trustees to preserve asset protection.
- Transfer Tax Avoidance
Estate and gift taxes can apply if a person holds a general power of appointment—the authority to direct trust property to themselves, their estate, or their creditors. However, if a beneficiary’s power to make distributions is constrained by ascertainable standards (like HEMS), it is not considered a general power of appointment under the Internal Revenue Code (IRC §§ 2041(b)(1)(A) and 2514(c)(1)). This helps avoid unintended inclusion of trust assets in the beneficiary’s taxable estate and prevents potential gift tax liability.
Even grantors themselves can benefit from this approach. If a settlor (trust creator) serves as trustee of an irrevocable trust for another person’s benefit and is bound by ascertainable standards, the trust assets may be excluded from the settlor’s estate under IRC § 2038.
- Income Tax Planning
For income tax purposes, a grantor is generally treated as the owner of trust property if they retain certain powers. However, if the power to distribute principal is limited by a “reasonably definite standard”—essentially equivalent to an ascertainable standard—they may avoid this classification, preserving favorable tax treatment.
What Are Ascertainable Standards?
The Uniform Trust Code and the Internal Revenue Code define ascertainable standards as those related to an individual’s:
- Health
- Education
- Maintenance
- Support
Treasury regulations further clarify acceptable terms, including:
- Support in reasonable comfort
- Maintenance in health and reasonable comfort
- Support in one’s accustomed standard of living
- Education (including college or professional schooling)
- Medical, dental, nursing, and hospital care
- Expenses related to invalidism
The IRS has even acknowledged “care” as an additional ascertainable standard. However, standards such as comfort, happiness, or welfare are typically not considered ascertainable unless modified by qualifying language (e.g., “support in reasonable comfort”) or specifically permitted under applicable state law.
To avoid ambiguity and unintended tax consequences, grantors are strongly advised to stick to the federally approved language and standards.
Clarifying the Terms: Ascertainable and Standard
- Ascertain means to make certain, determine, or remove doubt.
- A standard is an authoritative rule or benchmark by which something is measured.
Together, an ascertainable standard should provide a trustee with a clear, objective basis for determining whether a requested distribution is justified. In practice, however, these determinations can be complex and may depend on nuanced state laws and court interpretations.
Common Interpretations of “Maintenance” and “Support”
Courts often treat “maintenance” and “support” as interchangeable and not restricted to bare necessities. These terms can encompass a beneficiary’s general lifestyle needs, including the support of their spouse and children. If a grantor does not intend to support a beneficiary’s extended family, that intent should be explicitly stated in the trust or will to avoid misinterpretation.
Conclusion
Ascertainable standards strike a balance between providing flexibility and preserving protections in trust administration. They give beneficiaries and trustees a framework for responsible distribution while offering substantial benefits in terms of asset protection, estate tax minimization, and income tax planning. When drafted correctly, these standards can help fulfill the grantor’s intentions while navigating the complexities of tax and fiduciary law.
These legal topics are provided to you by the President of QMC, Mark Easley. While QMC does not engage in the practice of law, Mr. Easley has practiced estate planning and elder law for over 30 years and is currently the principal at the Elder and Estate Planning Law Firm of St. Louis.