Intentionally Defective Grantor Trusts (IDGT) – A Powerful Tool in Estate Planning

What is an IDGT?

What is an IDGT?

An Intentionally Defective Grantor Trust (IDGT) is a powerful tool in estate planning that allows individuals to transfer assets to a trust while still retaining certain control and benefits. Despite its name, an IDGT is intentionally designed to be “defective” for income tax purposes, meaning that the grantor is still responsible for paying income taxes on the trust’s income.

So how does an IDGT work? When assets are transferred to an IDGT, they are considered to be removed from the grantor’s estate for estate tax purposes. This means that any appreciation or income generated by the assets in the trust will not be subject to estate taxes upon the grantor’s death. Additionally, because the grantor is responsible for paying the income taxes on the trust’s income, the assets in the trust can grow tax-free.

One of the key benefits of an IDGT is the ability to freeze the value of assets for estate tax purposes. By transferring assets to the trust, the grantor can effectively remove the future appreciation of those assets from their taxable estate. This can be especially advantageous for individuals with high net worth who want to minimize their estate tax liability.

Another advantage of an IDGT is the ability to leverage the grantor’s gift and generation-skipping transfer (GST) tax exemptions. By making a gift to the trust, the grantor can use their gift tax exemption to transfer a significant amount of assets without incurring gift taxes. Additionally, if the trust is structured as a GST trust, it can also leverage the grantor’s GST tax exemption to transfer wealth to future generations without incurring GST taxes.