Six years ago I posted this article proposing use of an advanced planning technique known as the Health and Education Exclusion Trust (HEET) to leave a dynastic legacy of firearm training. Such a trust might be called a Gun HEET.
The Fall of the Republic and associated increase in violent crime, together with expected sharp reductions in exclusions from death tax, have led to increasing discussion of this idea among colleagues. In my practice, I currently have two high net worth (HNW) client couples seriously considering use of the technique.
HEETs are potentially useful in larger estates passing significant wealth to descendants two or more generations below the transferor, where all available Generation-Skipping Transfer (GST) tax exclusion is expected to be completely allocated, used and exhausted, and where there is a desire to make significant expenditures for health care and education costs on behalf of those descendants two or more generations below the transferor. (The beneficiaries do not actually have to be descendants, but if not related then certain age rules apply.)
Under IRC §2611(b):
any transfer which, if made inter vivos by an individual, would not be treated as a taxable gift by reason of section 2503(e) (relating to exclusion of certain transfers for educational or medical expenses)
is excluded from the definition of “generation-skipping transfer”.
Under IRC §2503(e):
(1) In general
Any qualified transfer shall not be treated as a transfer of property by gift for purposes of this chapter.(2) Qualified transfer
For purposes of this subsection, the term “qualified transfer” means any amount paid on behalf of an individual—
(A) as tuition to an educational organization described in section 170(b)(1)(A)(ii) for the education or training of such individual, or
(B) to any person who provides medical care (as defined in section 213(d)) with respect to such individual as payment for such medical care.
IRC §170(b)(1)(A)(ii) specifies:
an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on
Thus, although IRS guidance on HEETs is minimal, you can see there is clearly potential for medical care payments made directly to medical care providers, and tuition payments made directly to educational organizations fitting the above description, all on behalf of beneficiaries who would be “skip persons” (for example, descendants two or more generations below transferor), to fall outside the definition of “generation-skipping transfer” and therefore not be subject to GST tax, even if the payments are made by a non-GST-exempt trust (a trust to which no GST exemption has been allocated).
The HEET can be a lifetime gift ILT for estate reduction, or if control is desired the HEET can be funded by an RLT. (Since the HEET makes the most sense where GST exemption is exhausted, or expected to be exhausted, the lifetime gift option will usually be preferred as estate tax exemption will also likely be exhausted and further estate reduction will likely be beneficial.)
The big issue to deal with is that GST tax is owed on transfer to a skip person, and where all remaining trust beneficiaries are skip persons the trust itself is considered a skip person (“taxable termination” occurs when last non-skip person dies).
The solution developed by estate planning attorneys is to include a charity as a beneficiary. The charity (or successor) will live forever and thus the dreaded taxable termination will be avoided. Conservative practitioners recommend distributing at least ten percent of income to the charity so it is not disregarded by the IRS.
Also, it is strongly recommended that a 501(c)(3) charity in strict compliance be designated, rather than a 501(c)(4).
So for example, if you want to designate a gun organization as charity for a Gun HEET, you may want to select the NRA Foundation, a 501(c)(3), but would NOT be advised to select the NRA itself, which is a 501(c)(4). Other gun orgs may have similar educational foundations, less involved in politics.
If designed as a grantor trust, the grantor while living may be able to take a charitable income tax deduction for amounts distributed to the charity. After grantor dies, the HEET itself gets the deduction in calculating its own trust-level income taxation.
Apart from designating a gun org 501(c)(3) as charity, which may indeed be a worthy objective (to the extent the gun org is worthy), what does all this have to do with using a Gun HEET to leave a legacy of firearm training?
You could view the charity requirement as completely separate and distinct from the requirement of making payments for tuition and medical care directly to qualifying providers. You can pick any 501(c)(3) you want, doesn’t have to be gun-related. Or if you are passionate about spreading the kind of substandard firearm training propagated by the gun org educational affiliates, possibly because you expect some indirect political benefit from their approach to mass training, then go for it. But for your own family, you want the best in firearm training (if for no other reason than to minimize payments for medical care upon negligent discharge) and you will instruct the trustee to select qualifying educational institutions that offer not only top-tier firearm training but all the other training, including values-based education, necessary in your opinion for a successful firearm legacy. Tuition payments (tuition only, not books, etc.) will qualify at any level of education so long as the educational organization meets the above description.
Or, you could potentially combine the two endeavors by setting up your own “dynastic” firearm school as a 501(c)(3) nonprofit. This is more risky and requires strict compliance over time to avoid any impermissible benefit to your family from the nonprofit’s activities. If you, your family, and your trustees, are all careful about following the rules, staying at arms length from the nonprofit school whether as students or as hired instructors, this could be a very good way of channeling tuition payments to a school with the training philosophy you like, in a way that can benefit others in your local community. Note that, in addition to strictly complying with 501(c)(3) requirements especially in dealings with family and trustees, the nonprofit school under this arrangement must also qualify under the IRC §170(b)(1)(A)(ii) description of an educational organization with regular faculty, curriculum and students. While it may be safer to broaden curriculum beyond simply firearm training, note that a martial arts school was approved in Rev. Rul. 78-309, 1978-2 C.B. 123.
