An Intentionally Defective Grantor Trust (IDGT) is commonly used as an effective tool for estate tax planning.
An IDGT is disregarded for income tax purposes, but it is a legally valid irrevocable trust for estate tax purposes. Appreciating assets are usually transferred to an IDGT out of the grantor’s taxable estate. Once the assets are transferred and owned by the IDGT, they are no longer a part of the grantor’s taxable estate. Still the grantor of the IDGT retains some rights and reports the earnings from the IDGT’s assets on his/her personal tax return, while all of the investment income and appreciation remains within the IDGT.
IDGTs are complex in nature, but this article published by the CalCPA Education Foundation provides a very nice overview of how IDGTs work and can be beneficial for estate tax planning purposes. To view the article, click here.
