ESTATE PLANNING, WILLS & TRUSTS

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INTENTIONALLY DEFECTIVE GRANTOR TRUSTS

 

The Intentionally Defective Grantor Trust

 

The Intentionally Defective Grantor Trust (IDGT) receives its name due to its inclusion of specific terms which are intended to violate the grantor trust rules under the Internal Revenue Code (IRC). The Grantor of an IDGT is deemed to be the owner of the trust property for income tax purposes so all income or loss of the IDGT is reported directly from the trust to the Grantor. Violating certain grantor trust rules contained in the IRC allows the trust to remain a grantor trust for income tax purposes, but does not violate the estate tax inclusion rules which keeps the value of the trust corpus outside of the Grantor's estate for estate tax purposes.

 

Sales of Property Between a Grantor and Grantor Trust

 

Since the Grantor of an IDGT is deemed to be the owner of the trust property for income tax purposes, sales of property between the Grantor and a Grantor Trust are ignored for income tax purposes and no taxable income or loss is recognized. As long as the Grantor receives adequate consideration for the sale of assets to an IDGT, the Grantor benefits from the elimination of estate tax considerations as well.

 

Sales of Family Limited Partnerships or Limited Liability Interests to a Grantor Trust

 

When an IDGT is created and used in conjunction with a Family Limited Partnership (FLP) or Family Limited Liability Company (FLLC), a family receives one of the highest forms of advanced estate planning, asset protection and business continuity that can be achieved for family wealth preservation.  The combined use of these two techniques capitalizes on discounting and business continuity through the implementation of the FLP or FLLC and maximizes the amount of assets that can be removed from a Grantor's estate by selling them to an IDGT. In addition, the combination of these two techniques freezes the value of the assets from future inclusion in the Grantor's estate. It can be difficult to recognize or fully appreciate the significance of freezing assets when initially creating this type of estate plan. It may even take upwards of 25 or 30 years, once the assets have substantially appreciated in value, to truly realize the powerful effects of these estate planning tools.

 

Please contact us today to discuss your immediate estate planning needs and long-term wealth preservation goals.