[UPDATE 30 September 2024 — The Fall of the Republic and likelihood of reduced exclusions from death tax are leading to renewed interest in this technique. While there remains little guidance, if used conservatively it should work for extremely large estates where it is expected that all GSTT exemption will be used and where there is a desire to spend large sums on education and training, including firearm training. For this method to work, a charitable beneficiary — 501(c)(3) strongly recommended — must be included as an income beneficiary — 10% recommended — along with the descendants. This can be a gun org like NRA or CRPA (that is, their 501(c)(3) affiliates), or if you don’t like them you can form your own non-profit firearm training institution. Just be careful to maintain them in compliance.]
Our Firearms Instruction and Responsible Stewardship Trust (F.I.R.S.T. Family Trust) takes many forms as it is custom like all our planning, but one variant involves a Health and Education Exclusion Trust. This type of trust allows you to give much greater amounts to your grandkids and great-grandkids for health and education while avoiding the dreaded generation skipping transfer tax, and there is even a revenue ruling on point where a HEET was set up involving a martial arts school (Rev. Rul. 78-309, 1978-2 C.B. 123).
The generation-skipping transfer tax (GSTT) often impedes 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.
However, there is a way for your clients to make such gifts without incurring the GSTT and that’s through the creation of a Health and Education Exclusion Trust (HEET). As the name implies, these trusts can only pay for the medical and/or educational needs of your clients’ 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. 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. However, it’s wise to consider an amount between 6 and 10 percent in order to pass IRS scrutiny.
A HEET can be used to pay the educational expenses of a client’s grandchildren. Unlike a 529 plan, it can be used to fund education at any level, from kindergarten to graduate school. While HEETs can’t benefit a client’s children directly, they do so indirectly by removing a parent’s financial obligations to pay for educational expenses. Additionally, medical insurance premium payments for descendants also qualify under HEET. If the HEET is created during a client’s lifetime, it is an irrevocable trust and not part of the estate—thus minimizing a client’s estate tax liability. Since clients permanently lose access to HEET funds in an irrevocable trust, some may decide to fund a HEET via a will or revocable trust. In this instance, the HEET will go into effect posthumously. It’s important to note, that HEETs created in this manner are subject to applicable estate taxes.
Source: Member.WealthCounsel.com
