Definition:

A special type of irrevocable trust that is designed to pay for the health care costs and certain education expenses of the beneficiaries of the trust, free from gift taxes and generation-skipping transfer taxes. In addition, HEETs can be designed to avoid estate taxes as well as provide charitable income tax deductions for the grantor of the trust.

A HEET uses the concept of "gifts that aren't really gifts" as provided for in section 2503(e) of the Internal Revenue Code, which states the following:

(e) Exclusion for certain transfers for educational expenses or medical expenses

(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.

This means that direct payments for tuition for education and for medical expenses and insurance can be made from a HEET for the benefit of a grandchild or great grandchild and avoid gift taxes.

In addition, a HEET couples the provisions of 2503(e) of the Code with the provisions of section 2611(b)(1) of the Internal Revenue Code which states the following:

(b) Certain transfers excluded

The term “generation-skipping transfer” does not include—

(1) 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)

This means that direct payments for tuition for education and for medical expenses and insurance can be made from a HEET for the benefit of a grandchild or great grandchild and avoid generation-skipping transfer taxes.

Also Known As: HEET