HEET: Charitable Beneficiary or Charitable Donation?

[Christopher00]

A Health and Education Trust lists a charity as "The 'Charitable beneficiary' of my trust".  When filling out the Federal 1041 in TurboTax Business:

1) Is the charity entered as a Beneficiary under the General Info: Beneficiary Information section and then checked as a Charity?  With the income distributed to the Charity entered under the Federal Taxes: Distributions section.

or

2) Is the distribution to the Charity entered under the Federal Taxes: Charitable Deductions Section?

When the charitable contribution is tracked as a beneficiary, a K-1 is created, and the portion of taxes is passed to the charity which is not required to pay taxes.  The distribution is then captured in Schedule B, line 9 of 1041, increasing the Income Distribution Deduction.  In this case, the maximum "deduction" is the income of the trust (if 100% of the income was distributed to the charity).  Note: It also takes any foreign tax reduction with it.  If there are any capital gains of the trust, any amount greater than the trust income does not reduce the trust's taxes on the capital gains.

When the charitable contribution is tracked as a deduction, the information is entered into Schedule A Line 1 of 1041 increasing the charitable deduction.  This reduces the trust's distributable net income. If the deduction exceeds the trust's income, it can then reduce the taxes due on the capital gains of the trust.

It appears it is better to record the charitable donation as a deduction and not a beneficiary distribution, but I am not sure if this is acceptable or appropriate.

Thoughts?

[tagteam]

HEETs are typically set up to avoid GST tax.

I believe a HEET must be set up with at least one beneficiary that is a charity. If that is the case, then the deduction is not appropriate. 

Frankly, you should seek professional tax guidance for this scenario. 

[Christopher00]

You are correct, a HEET requires a non-skip person, charitable organization as a beneficiary.

I am spot checking my CPA because I have always had a few questions and he has not provided satisfactory answers.  So I am asking the forum what their understanding is.

My interpretation would match yours, that since the charity is called out as a beneficiary any money distributed from the trust would be a beneficiary distribution.

However, my CPA has been putting this under charitable Deductions.

I am curious to know if this is a 6, 1/2 dozen choice or if there is a clear differentiation between which choice to make.

I would appreciate thoughts and comments from the community.

[tagteam]

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@Christopher00 wrote:

However, my CPA has been putting this under charitable Deductions.

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I really doubt whether this is the correct treatment for this type of trust. I believe the charitable organization needs to be a beneficiary and a distribution made.

I would suggest seeking guidance from local legal (and/or tax) counsel who not only specializes in estate planning but is well versed in dealing with charitable trusts.