***It’s Like a HEET Wave! Why Boomers Should Consider a Health and Education Exclusion Trust

As many Boomers (particularly those of us here on the East Coast) muscle through the effects of the latest summer heat wave, I thought it prudent to bring attention to another type of HEET – the Health and Education Exclusion Trust!

Be the Lifeline!

Without a doubt, legacies begin to form before someone passes. This is good news for Boomers who are living longer than preceding generations as this means more time with your loved ones building those legacies. That said, a Boomer’s love and support can continue to thrive after death. When family members are faced with the difficult dilemma of paying for the ever increasing costs of education and medical expenses, Boomers can be the lifeline that solves this dilemma by establishing and funding a Health and Education Exclusion Trust for their children’s, grandchildren’s, great grandchildren’s or even future generations’ benefit.

What is a HEET?

A Health and Education Exclusion Trust (hereinafter “HEET”) is a tool that Estate Planners recommend to those of their clients who (a) have a substantial amount of wealth that they would like to transfer to younger generations free of estate, gift and generation-skipping transfer taxes and (b) would like that wealth used to pay for their family members’ education and medical expenses.

Once established and funded, a HEET can then be used to pay for children’s/grandchildren’s/great grandchildren’s/descendants’ medical and educational expenses. The caveat? Distributions from the HEET can not be made to a beneficiary, but rather must be made directly to educational or medical providers to pay for qualified expenses. Any other distribution, either to a beneficiary or for non-qualified expenses would result in the distribution from the HEET to be subject to generation-skipping transfer taxes (as high as 50%).

How Does a HEET Work?

How this works specifically is that a grandparent, in their Will or Revocable Trust, provides that the amount of assets in excess of the amount that passes free of generation-skipping taxes, after payment of estate taxes, will be used to fund the HEET. In 2009, what this meant that if a grandparent had an estate of $10,000,000, then the first $3,5000,000 could be distributed to children, in a lifetime trust, or grandchildren, with no distribution restrictions, and then the excess, after payment of almost 3 million in Federal estate taxes, i.e., $3,500,000, would be used to fund the HEET.

Once funded, the Trustee for the HEET can pay on a beneficiary’s behalf, an unlimited amount of qualified education expenses[i] and qualified medical expenses. The Internal Revenue Service (“IRS”) defines qualified education expenses as payment of tuition, in any amount, for full or part time students attending primary, secondary, undergraduate or post graduate domestic or foreign education programs. However, the educational institutions do not necessarily need to be accredited and tuition can also be paid for art, literary or similar education programs. Just think of the possibilities and opportunities for grandchildren to explore and cultivate their talents or perhaps to obtain the additional educational assistance suited to meet their individual needs.

The IRS defines qualified medical expenses as payments, in any amount, that are made to any person who renders services to the beneficiary for the purpose of “diagnosis, cure, mitigation, treatment or prevention of disease or for the purpose of affecting any structure or function of the body or for transportation primarily for and essential to medical care.” [ii] Qualified medical expenses also the purchase of health insurance and long term can insurance for their grandchildren. Fortunately or unfortunately, elective surgery is not considered a qualified medical expense. Moreover, it is important to note that the only medical expenses that can be paid are those that are not reimbursed by any insurance company. Therefore, the HEET must be careful in making distributions for only unreimbursed qualified medical expenses. Otherwise, when a prior payment of qualified medical expenses is reimbursed by an insurance company that will constitute a taxable distribution by the HEET, thereby trigger an expensive generation-skipping transfer tax.

One other important feature of a HEET is that a charity, maybe the wealthy grandparents’ private foundation, must be a mandatory income beneficiary of part of the income generated by a HEET. This is necessary to prevent the imposition of a generation skipping transfer tax. The real value of a HEET is that a grandparent does not allocate generation-skipping transfer exemption to assets that fund a HEET, but instead the GST exemption can be used for other distributions to grandchildren/great-grandchildren. What this means is that a grandparent can leave more assets to grandchildren/great-grandchildren without the imposition of the additional generation skipping transfer tax.

Is a HEET for Me?

Determining whether you should create a HEET should be a decision that you discuss with your estate planning atto
ey, who can advise you if it would be an appropriate component to your overall estate plan based on your desires and financial resources. For those who are not as wealthy, they can make gifts to their grandchildren, for any purpose, without any restriction, either during life or at death. As noted in prior articles, grandparents can make an annual gift tax exclusion gift to their grandchildren (or other persons) in the amount of $13,000 (individually) or $26,000 (married persons) each and every year. This amount can also be placed in a properly drafted trust for a grandchild. Moreover, during life, individuals may make gifts up to $1,000,000 (individually) or $2,000,000 (married couples) exempt from current gift taxes. Grandparents could transfer assets with the value equal to their remaining lifetime gift tax exemption to their grandchildren or a trust for their grandchildren, without the restrictions noted above for a HEET.

The Bottom Line?

None of these wealth transfer gifts or trust should be tried without the help of an experience estate tax atto
ey. If the wrong words are used or if the wrong amount is given, a gift, estate or generation-skipping transfer tax can occur.

Copyright © 2010 by Gary Altman, Esq. All Rights Reserved.