When to Choose an Intentionally Defective Grantor Trust (IDGT)
An Intentionally Defective Grantor Trust (IDGT) is a useful tool for families and individuals who have appreciating assets, such as a family business or real estate. It allows the grantor to transfer appreciating assets, while minimizing tax exposure. By establishing an IDGT, the grantor pays income taxes on trust assets, allowing them to grow tax-free for the benefit of future generations. The unique structure significantly reduces the size of the grantor’s estate while shifting valuable assets out of it, avoiding substantial estate taxes down the line. An intentionally defective grantor trust is drafted using language that contains “intentional defects.” These are provisions that make the trust meet the definition of a revocable trust for income tax purposes, while also being considered an irrevocable trust for estate tax purposes. For a revocable trust, income is usually taxed to the grantor of the trust who is treated as the owner for tax
