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Creating Health and Education Exclusion Trusts (HEET)

The generation skipping trust tax (GSTT) trips up the plans of clients who wish to leave assets to their grandchildren. The GSTT is the IRS’s way of ensuring such gifts—as well as the grandparent’s estate—do not escape taxation.

There is a way for you to make such gifts without incurring the GSTT, and that’s through creation of a Health and Education Exclusion Trust (HEET). As the name implies, funds in these trusts can pay only for the medical or educational needs of your grandchildren and their descendants.

Why HEETS are Hot

While grandchildren or their descendants can benefit from a HEET, there’s a catch–at least one beneficiary must be a charitable organization. Having a charity involved prevents a HEET from acting as a garden variety generation skipping trust. Such charities are generally schools, from kindergarten through university level. For medical expenses, name a suitable hospital or other care facility as the beneficiary. Charitable beneficiaries receive funds as “qualified transfers” as per IRS rules. The amount of income received by the charity annually depends on the individual HEET. It’s wise to consider an amount between 6 and 10 percent to pass IRS scrutiny.

With sufficient funding, a HEET can pay the educational expenses of all grandchildren from K to JD, MD or Ph.D… all while promoting philanthropy. While HEET trusts can’t benefit a client’s children directly, they do so indirectly by allowing parents to no longer worry about college expenses. Medical insurance premium payments for descendants also qualify under HEET.

If the HEET is created during your lifetime, it is an irrevocable trust and not part of the estate. Since you permanently lose access to HEET funds in an irrevocable trust, you may decide to fund a HEET via a will or revocable trust, and the HEET goes into effect posthumously. HEETS created in this manner are subject to applicable estate taxes, but not gift taxes.

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