Intentionally Defective Grantor Trust

Establishing a trust as part of your financial plan can yield certain benefits and can potentially minimize estate taxes. Am intentionally defective grantor trust (IDGT) is a type of irrevocable trust that can be used to limit tax liability when transferring wealth to your heirs. This type of trust can be used tp benefit anyone from your spouse to your grandchildren. It may be more useful in certain situations than in others. Becoming more knowledgable on the details of an IDGT can help you decide if it will work for you. 

The Basics 

An IDGT is a type of irrevocable grantor trust. An irrevocable trust is one that can’t be changed once it’s established. Basically, if you create the trust and transfer assets to it, those assets can’t be transferred back out again and the terms of the trust cannot be altered in any way. 

What sets an IDGT apart from other types of trusts, is the manner in which assets in the trust are treated for tax purposes. The IDGT allows you to transfer assets outside of your estate, allowing you to avoid estate and gift taxes but not income tax. 

Tax Benefits of an IDGT

The structure of an IDGT is an intentional flaw that’s designed to provide tax benefits for the trust grantor and the beneficiaries of the trust. In a sense, the trust is defective because you still pay income tax on the assets even though they’re no longer part of your estate. When you create an IDGT, you’re freezing your assets in the trust to help your beneficiaries avoid estate and gift tax; and since the trust is irrevocable, the assets will stay in the trust until you pass. 

See Rebecca Lake, Intentionally Defective Grantor Trust, Smart Asset, June 3, 2020. 

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