Pros of Intentionally Defective Grantor Trusts

Many planners will advise wealthy clients to set up an irrevocable life insurance trust (ILIT). But with this plan, the clients have to gift money in premiums to an ILIT and pay gift-taxes on that money or use their lifetime gift tax exemption.

A way to obtain life insurance without worrying about taxable gifts is to use an intentionally defective grantor trust (IDGT). Essentially, these IDGTs create a family bank for heirs that would be funded when the clients die. Many clients set these up to be a lending source for the whole family in the future.   

For an example that further explains IDGTs, please visit the following article: 

See Roccy DeFrancesco, Using IDGTs to Create the Family Bank Through the Tax Favorable purchase of Life Insurance, Family Bank, Nov. 2, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.