Loune-Djenia Askew, Esq.
Sep 30, 2024
IDGTs are considered irrevocable trusts, meaning the grantor loses direct control of the assets placed inside. However, this structure provides several tax benefits for transferring wealth efficiently.
What is an IDGT?
An Intentionally Defective Grantor Trust (IDGT) is a special estate planning tool that helps transfer wealth to family members during the grantor’s lifetime. Despite the confusing term “defective,” it refers to a trust designed for the grantor to pay income tax on the trust’s earnings, while removing the assets from their estate for tax purposes.
IDGTs are considered irrevocable trusts, meaning the grantor loses direct control of the assets placed inside. However, this structure provides several tax benefits for transferring wealth efficiently.
The Four Key Taxes Related to IDGTs
When setting up an IDGT, it’s important to understand four types of taxes:
Estate Tax: Assets in the IDGT are removed from the grantor's estate, which helps avoid estate tax upon death.
Gift Tax: Any assets transferred to the trust count towards the grantor’s lifetime gift tax exemption.
Generation-Skipping Transfer (GST) Tax: If structured properly, the assets in the IDGT can pass tax-free to grandchildren or future generations.
Income Tax: The grantor continues to pay income taxes on the trust’s earnings, allowing the assets to grow without depleting the trust’s value.
Why Choose an IDGT?
An IDGT is commonly used by individuals who expect their assets to appreciate over time. By placing appreciating assets in the trust, the grantor effectively freezes their value for estate tax purposes, so that any growth in value benefits the beneficiaries without additional taxation. This trust is also advantageous for those who wish to make use of their lifetime gift tax exemption and avoid double taxation on wealth passed to future generations.
How Does the Grantor Pay Taxes for the Trust?
One of the main features of an IDGT is that the grantor is responsible for paying income tax on the trust’s earnings. While this may seem like a drawback, it’s actually a strategic benefit. By paying the taxes, the grantor is essentially making additional, tax-free contributions to the trust, allowing the assets inside to grow faster than they would if the trust had to cover the tax bill.
An IDGT is an effective estate planning tool for those looking to transfer wealth efficiently to family members while minimizing estate and gift taxes. It offers flexibility in wealth distribution and protection from certain tax burdens, making it a popular choice for high-net-worth individuals. Always consult an estate planning attorney to ensure it fits your unique financial situation.
For more information, contact our office at Askew & Associates, P.A. by calling 954-546-2699.
Disclaimer: this blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns.