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.
Additionally, a HEET doesn’t just benefit the client, it can also benefit the attorney that prepares the trust. If a trust is not irrevocable or allows the grantor to make modifications to the trust over time—such as add more beneficiaries or set aside additional property for funding the trust—HEETs are a good opportunity for recurring business. While HEETs can be quite time consuming to create, there are tools that provide document automation and built-in adaptability; allowing attorneys to draft HEETs and other types of estate planning documents efficiently and with the flexibility that clients require.
Drafting HEETs efficiently and intelligently
The best software for your estate planning practice offers more than accurate, consistent document formation. At WealthCounsel, our Wealth Docx® software helps attorneys draft many different types of trusts, including HEETs, efficiently. With features such as customizable default settings, the Scenario Feature, and Interview function, estate planners can streamline the drafting process and reduce data entry. See for yourself by downloading a sample HEET document.