Intentionally Defective Grantor Trust

Intentionally Defective Grantor Trust

by Richard C. Wilson & Family Offices Group Association Team

Family Office Definition: Intentionally Defective Grantor Trust

Intentionally Defective Grantor Trust definition:  (IDGT) is an irrevocable trust that allows assets to appreciate without being subject to capital gains or transfer taxes when the assets are sold. The grantor also avoids estate taxes, gift taxes, and generation-skipping transfer taxes on the initial funding amount if it does not exceed the annual exclusion amount or lifetime credit. This is accomplished with an installment sale where all appreciation exceeding the loan interest rate transfers to the beneficiary (or borrower) tax free. Upon death of the grantor, the taxable estate includes any unpaid balance and interest for the non-appreciating installment loan, while the appreciating assets are owned by the trust and no longer part of the taxable estate.  However, the grantor is responsible for income taxes on the trust (which is why it is called “defective”).  Low-basis stock, real estate, or minority discounted family business shares are examples of appreciating assets that can be sold to the trust without recognizing capital gains and effectively transferring significant wealth to heirs at a fixed lower value.

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