What is Intentionally Defective Grantor Trust ?
987 reads · Last updated: December 5, 2024
An intentionally defective grantor (IDGT) trust is an estate-planning tool used to freeze certain assets of an individual for estate tax purposes but not for income tax purposes. The intentionally defective trust is created as a grantor trust with a loophole that allows the them to receive income from certain trust assets.The grantor pays income tax on any generated income, but the estate does not incur any estate taxes when the grantor dies.
Definition
An Intentionally Defective Grantor Trust (IDGT) is an estate planning tool used to freeze certain assets for estate tax purposes but not for income tax purposes. This trust is designed as a grantor trust, exploiting a loophole that allows the grantor to receive income from certain trust assets.
Origin
The concept of the Intentionally Defective Grantor Trust originated in the United States as a tax planning strategy to help high-net-worth individuals manage and transfer wealth during their lifetime. Its development is closely linked to changes in U.S. tax law, particularly in the late 20th and early 21st centuries, as the demand for tax planning increased.
Categories and Features
IDGTs are primarily divided into two categories: revocable trusts and irrevocable trusts. Revocable trusts allow the grantor to modify or revoke the trust during their lifetime, whereas irrevocable trusts cannot be changed once established. The main feature of an IDGT is that the grantor must pay income tax, but the assets are not subject to estate tax upon the grantor's death. This makes IDGTs an effective tool for estate tax avoidance.
Case Studies
Case Study 1: A high-net-worth individual established an IDGT during their lifetime, transferring some stock assets into the trust. This allowed them to continue receiving income from these assets while alive, but upon death, these assets were not included in the estate tax calculation. Case Study 2: A business owner used an IDGT to transfer company shares to their children, avoiding substantial estate taxes while continuing to enjoy income from the shares during their lifetime.
Common Issues
Common questions from investors include: Is an IDGT suitable for everyone? Typically, IDGTs are suitable for high-net-worth individuals, especially those looking to manage estate tax burdens during their lifetime. Another common misconception is that IDGTs can completely eliminate all tax liabilities; in reality, the grantor still needs to pay income tax.
