Planning For A Secure Future

Is an intentionally defective grantor trust right for my estate?

On Behalf of | Sep 26, 2023 | Estate Planning

Many types of trusts are available for people in California looking to protect their assets. One of the most beneficial trusts for wealthy families is an intentionally defective grantor trust (IDGT). These trusts allow the grantor to retain specific powers over the assets.

Intentionally defective grantor trusts explained

Using an IDGT can help you significantly grow the value of your assets. In traditional grantor trusts, the trust holder must pay income taxes on the earnings. As with conventional grantor trusts, an IDGT trust protects assets from creditors, as the grantor technically does not own it. At the same time, it also reduces estate tax exposure by removing assets from the grantor’s gross estate,

IDGTs offer you significant benefits for your estate. These include:

• Reduces the taxable amount of the estate by the amount of taxes paid by the grantor

• Assets are not depleted over the years, helping to preserve them

Funding an IDGT

You can fund these trusts in several ways. The most common methods involve gifting or selling assets to the trust. Sometimes, a combination of the two occurs. Particularly when selling assets to the trust, the grantor believes the assets will appreciate considerably. Without this appreciation, the estate would not realize savings advantages.

Setting up an IDGT

These trusts can become part of your estate plan, but they need special consideration. They become “defective” using specific language acceptable by Internal Revenue Code (IDC) provisions. IDGT trusts are unique in that they are revocable for income taxes but irrevocable for estate tax purposes. Grantors can also include language in an IDGT that allows them to substitute assets already in the trust, can take loans from the trust and change beneficiaries.

Many estate plans include a variety of irrevocable and revocable trusts and other financial instruments, such as retirement accounts, to protect assets. Carefully consider whether an IDGT is appropriate for your situation. In some instances, your estate may benefit more from creating other types of trust, especially if the assets you are considering placing in one do not have the potential to appreciate considerably.