Using an Intentionally Defective Grantor Trust to Transfer Assets
An intentionally defective grantor trust (IDGT) is a common estate planning tool that is used by wealthy families to transfer assets from one generation to the next while achieving significant tax savings. IDGTs are especially useful if you have assets that will appreciate significantly over time.
Posted on May 16, 2022

An IDGT is “intentionally defective” because it purposely gives the grantor – the person creating the trust – a right or power that allows the grantor to pay taxes on the income generated by the trust even though the trust assets are not a part of the grantor’s estate. The trust is irrevocable, which means the trust assets will not be counted for estate tax purposes. Transferring assets to an IDGT takes the assets out of an estate while the trust’s income is taxed at the grantor’s personal rate, not the trust’s much higher rate.
The benefit of an IDGT is that it allows the trust to grow without having to use trust assets to pay income taxes. This amounts to a tax-free gift to the trust. In addition, by paying the income taxes, you are also continuing to lower your taxable estate. IDGTs work best for assets that are likely to appreciate significantly in value, such as stock or real estate. For example, suppose you fund an IDGT with $10 million in assets and it earns 5 percent annually over a 30-year period. If the trust does not have to pay income tax, it might grow to more than $43 million. If the trust needs to pay income taxes from its own assets, its growth would likely be significantly less.
FREE WEBINAR
5 Things to Know About
Estate Planning
When You Turn Sixty-Five
Bear in mind that when you transfer the assets to the trust, the transfer may be subject to gift taxes. Currently, the annual gift tax exclusion is $16,000 (for 2022). This means that any person who gives away $16,000 or less to any one individual (anyone other than their spouse) does not have to report the gift or gifts to the IRS. In addition, the IRS allows you to give away a total of $12.06 million (in 2022) during your lifetime before a gift tax is owed. Even if you gift assets to an IDGT and reduce your future gift and estate tax exemption, any future growth will occur outside of your estate.
If you want to avoid gift taxes, you may be able to sell assets to the trust. This is usually done in installments through an interest-bearing promissory note. When an asset is sold to an IDGT, there are no capital gains taxes because you are selling something to yourself. If the assets in the trust gain more in value than the interest rate, then the sale will still benefit the trust overall. This strategy works best when interest rates are low.
To find out if an IDGT is right for you, contact us today.
More from our blog…
Is Your Financial Information in Order?
Preparing and organizing your financial information for when you are no longer capable will bring peace of mind to you today. At the same time, [...]
Why Parents Need a Power of Attorney When Children Turn 18
Every parent knows that momentous feeling when their child turns 18. It's a major milestone, symbolizing the transition from adolescence to adulthood. While it's a [...]
Can Alzheimer’s Disease Be Prevented?
While new knowledge becomes available each year about promising potential treatments for Alzheimer’s disease, recent research is also focusing on the prevention of the disease [...]
Bifurcating the Role of a Trustee: A Modern Approach to Trust Management
Trusts have long been a cornerstone of estate planning, wealth management, and charitable giving. Traditionally, the trustee held a singular role, overseeing and managing the [...]
Recent blog posts
FREE WEBINAR
5 Things to Know About
Estate Planning
When You Turn Sixty-Five