Intentionally Defective Grantor Trust Diagram

The idgt is structured as a grantor trust for income tax purposes. Intentionally defective grantor trusts idgts are a commonly used estate planning vehicle to transfer wealth to family members during the life of the grantor.

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What is a grantor trust.

Intentionally defective grantor trust diagram. A grantor trust can be created a number of ways as discussed below. The effective defective trust an intentionally defective grantor trust idgt is a grantor trust for income tax purposes but a completed gift for estate and gift tax purposes. In fact this well established technique isnt defective at all.

Is a grantor trust for income tax purposes the intentionally defective grantor trusts sale of the asset would not result in any taxable gain to the grantor for income tax purposes the grantor is considered to be selling an asset to him or herself. There also is no interest in come reported by the grantor or interest deduc tion to the idgt. Grantor trust intentionally defective grantor trusts.

Others call it a tax planning opportunity and some never mention it at all. An intentionally defective grantor trust idgt is a complete transfer to a trust for transfer tax purposes but. By mark stone cpa pfs cfp mst.

What is an intentionally defective grantor trust. Estate tax planners have long employed intentionally defective grantor trusts to freeze the value of an asset for estate tax purposes while transferring assets out of the estate free of gift tax. An intentionally defective grantor trust idgt is a trust that is defective solely for income tax purposes.

Because the idgt is defective for income tax purposes all of the trust s income is taxed to the grantor which produces an additional tax free gift. 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. When two sets of tax laws use different standards to measure the outcome of a single transaction some advisers call the result a loophole.

The term defective describes the effect of income taxation rules on these instruments. The fact that the grantor trust rules are different for income tax and for gift and estate tax creates planning opportunities. An intentionally defective grantor trust idgt is a complete transfer to a trust.

This article discusses how an idgt is created and how to structure a sale to the trust for estate and gift tax planning. In this white paper we will explore the four tax types relevant to idgts and the mechanics of how idgts work. According to the tax laws irc 671 679 a grantor trust is any trust in which the trustorgrantor retains control over the income or principal or both to such an extent that he is regarded as the substantial owner of the trust property.

Estate planning with intentionally defective grantor trusts idgtsdespite the namehas many advantages.

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