An intentionally defective grantor trust (IDGT) is a very interesting estate planning tool. It can be used to freeze certain assets for estate tax purposes, but not for income tax purposes. It is best used, for example, for a business that you own that is expected to greatly increase in value over the upcoming years and is a business that you plan to transfer to your heirs upon your death. The intentionally defective trust is created as a grantor trust that ensures that the individual continues to pay income taxes.
There are many benefits of an intentionally defective grantor trust. Below are some highlighted key points to keep in mind:
- There is no tax on sale of stock to the trust
- The trust income is taxed to the grantor
- Transfer freezes asset value for estate tax purposes at time of transfer
- No tax to beneficiaries when grantor dies
- Transfer can be by gift or sale using lifetime exemption
- Sale is done with a note due in typically 10-15 years with interest just below 1% interest only loan with a balloon payment (income from interest is taxable)
- Sale does not realize any gain for the grantor
- To retain control of assets, your attorney must separate voting and non-voting stock
- Client retains 100% voting stock (1% of overall) and transfers the rest to the trust
- Children are the beneficiaries and become owners upon death
- There is no tax upon the transfer to children
- Grantor is not entitled to any trust distributions but does enjoy the interest from the “loan” for the “sale” of the stock to the trust
- Powers retained by grantor:
- Spouse / trustee may add beneficiaries
- May buy back or substitute trust assets
- Trust income may pay premiums for life insurance
As you can see from above, there are many benefits and stipulations that must be considered when drafting and utilizing an intentionally defective grantor trust. If you are interested in executing this type of trust or any type of estate planning tool please consider my law practice for your needs. I have two convenient office locations: 200 West Main Street, St. Charles, Illinois 60174 and 136 Kimball Street, Elgin, Illinois 60120.