Friday, January 21, 2022
With an Intentionally Defective Grantor Trust (IDGT) the settlor removes assets from the settlor's estate and moves them into the IDGT while retaining the income tax liability for the income generated by those assets.
An IDGT "can be beneficial for transferring wealth and reducing estate taxes." By retaining "grantor powers," the settlor is treated as the owner of the trust assets for income tax purposes and is taxed as if the settlor received the trust income directly.
These trusts are referred to as "'intentionally defective' because the settlor relinquishes ownership of the assets for estate tax purposes but remains the owner of the trust for income tax purposes."
The primary benefit of the grantor trust status is that the trust assets can continue to appreciate without being depleted by income tax payments, which amounts to an additional transfer of wealth to the trust beneficiaries that is not subject to transfer tax (Rev. Ruling 2004-64).
See Intentionally Defective Grantor Trust: Income Tax Issues, Wendel Rosen LLP, October 15, 2021.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.