expenses are excluded from both gift and GST taxes – if they are paid directly to the educational institution or to the medical care provider. High net worth individuals commonly use IRC Section 2503(c) as a wealth transfer strategy. By paying their grandchildren’s and great-grandchildren’s tuition and medical bills,How to HEET up an Estate Plan Articles they are removing assets from their estate, both gift and GST tax free. Moreover, there are no limitations as to the amount that can be paid for such expenses. However, this strategy only works while the grandparents are alive.
For those grandparents who wish to pay for their descendants’ education and medical bills while transferring significant assets out of their estates, a health and education exclusion trust, or “HEET”, should be established. The grandparents can set up an inter vivos HEET using their $13,000 / $26,000 annual gift tax exclusion (for 2010), their $1,000,000 / $2,000,000 gift tax exemption, or by naming the HEET as the remainder beneficiary of a zeroed-out grantor retained annuity trust or a zeroed-out charitable lead annuity trust (see below). Alternatively, a testamentary HEET can be established in the grandparent’s Will or Living Trust and funded at death. An inter vivos HEET can be an irrevocable life insurance trust (“ILIT”) drafted as a HEET. Assets used to fund a testamentary HEET (unless an ILIT is used) would be subject to estate taxes, but not the GST tax. However, by creating and funding an inter vivos HEET, the after-tax income and appreciation on the assets gifted to the HEET are removed from the grandparents’ estate.