What is an intentionally defective grantor trust?
The intentionally defective grantor trust (IDGT) is a type of trust that allows one to transfer property into a trust so that the value of that property will not be included in calculating his or her estate and, therefore, will be omitted from estate tax liability. At the same time, the value of the property transferred into the IDGT is still used in computing the grantor’s federal income tax liability.
How is the IDGT defective?
The IDGT is only defective insofar as the Internal Revenue Service does not consider it to be a separate entity from the grantor when assessing federal income taxes.
What types of powers may establish grantor trust status?
The power to reacquire trust property by replacing it with other property having an equal value, and to do so without the approval of the trustee;
The power to distribute income or principal among the beneficiaries;
The power to add more beneficiaries to the trust;
The power to accumulate or distribute income for the grantor’s spouse;
The power to use trust income in making life insurance premium payments; and,
The right to borrow despite having inadequate security to do so.
What is the benefit of being a beneficiary of an IDGT?
As an IDGT beneficiary, any distributions that are made to beneficiaries from the trust are tax-free.
Is it possible for the grantor to remove the trust’s IDGT status?
Yes. The best approach for doing so is likely to be the inclusion of a provision allowing for this within the terms of the trust.