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Using an Intentionally Defective Irrevocable Trust (IDIT) to Gift Your Family Business

By Gerry W. Beyer

GiftIf you are considering making a sizable gift to a family member, how you structure the transaction can have a meaningful impact on the success of the transfer, minimizing taxes, and the control you have even after making the gift.  Many that want to gift an interest in a family business usually have two main concerns: First, they want to make sure their children have the necessary skills and experience to successfully run the business. Second, they want to transfer partial ownership efficiently and in a way that affords them flexibility and helps minimize taxes.

There are several instances where the person making the gift as well as the recipient would benefit more to not receive the gift outright, but rather through a trust. Making a transfer in trust for the benefit of the child or family member can reduce many risks and concerns that the person making the transfer may have. If there are any worries that the person receiving the interest in the business will act irresponsibly, or lose the business to divorce or other debts, reserving it in an IDIT trust would solve these issues.

An intentionally defective irrevocable trust or IDIT (also referred to as an intentionally defective grantor trust or IDGT) is one of the tools that is frequently used for succession planning of closely-held businesses.These trusts provide protection against the beneficiary’s creditors and help minimize the chance of the beneficiary’s spouse obtaining any interest in the business as a result of a divorce. An IDIT can also provide flexibility by allowing the owner to swap assets transferred to the trust for other assets tax free.

See Robert Pagliarini, Using an Intentionally Defective Irrevocable Trust (IDIT) to Gift Your Family Business, Forbes, October 16, 2018.

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.) for bringing this article to my attention.

Posted in:
Current Affairs, Estate Administration, Estate Planning - Generally and Trusts