Intentionally Defective Grantor Trust
An Intentionally Defective Grantor Trust (IDGT) is a powerful estate planning tool that allows assets to appreciate outside of your taxable estate while still being taxed at your personal income tax rate. This strategic “defect” creates tax advantages, allowing you to pass wealth to beneficiaries with minimal tax consequences.
Key Features of an Intentionally Defective Grantor Trust
- Removes assets from estate taxes – Asset appreciation is excluded from your taxable estate.
- Pass-through taxation – The grantor pays income taxes on trust earnings, reducing the taxable estate over time.
- Ideal for high-growth assets – Maximizes wealth transfer benefits by shifting appreciation outside the estate.
- Allows asset sales without capital gains tax – Grantors can sell assets to the trust without triggering taxes.
- Preserves family wealth – Ensures structured, tax-efficient inheritance for beneficiaries.
Our Intentionally Defective Grantor Trust Services
Looking for a tax-efficient way to transfer wealth while keeping control over assets?
- Custom IDGT structuring – We design trusts that align with your estate planning and tax strategies.
- Wealth transfer optimization – We help structure sales or gifts of assets to maximize tax efficiency.
- Trust administration and compliance – Our team ensures legal adherence and proper trust management.
We specialize in advanced estate planning solutions that protect and maximize your wealth.
Who Should Consider an Intentionally Defective Grantor Trust?
An IDGT is ideal for individuals and families looking to transfer wealth tax-efficiently while retaining financial control. It is particularly beneficial for:
- High-net-worth individuals – Removes appreciating assets from the taxable estate.
- Business owners – Allows tax-efficient transfers of company shares or business interests.
- Real estate investors – Enables tax-advantaged wealth transfers while maintaining control.
- Families concerned about estate taxes – Reduces estate tax burdens for future generations.
- Individuals seeking asset protection – Shields assets from potential creditors while allowing strategic inheritance planning.
How to Set Up an Intentionally Defective Grantor Trust
Establishing an IDGT requires careful structuring to ensure compliance and maximize benefits. Here is our process:
- Initial consultation – We assess your financial situation, tax goals, and estate planning needs.
- Trust drafting – Our attorneys create a customized IDGT agreement tailored to your objectives.
- Asset transfer or sale – You can sell or gift appreciating assets to the trust in exchange for a promissory note.
- Income tax management – The grantor continues paying taxes on trust earnings, reducing the taxable estate.
- Trust administration and compliance – We ensure the trust remains legally sound and optimized for tax benefits.
Disadvantages of an Intentionally Defective Grantor Trust
While an IDGT provides major estate tax benefits, it has some drawbacks:
- Grantor pays trust taxes – The grantor is usually responsible for income taxes on trust earnings.
- Requires careful planning – Improper structuring can lead to IRS scrutiny.
- Irrevocable structure – Once established, the trust cannot be easily modified.
- Promissory note risks – If assets do not appreciate as expected, repayment terms may become an issue.
- Complex legal and tax considerations – Requires expert guidance to execute correctly.
Intentionally Defective Grantor Trust FAQ
The trust is designed with a “defect” that keeps the grantor responsible for income taxes, creating estate tax advantages.
No, once assets are placed in the trust, they are controlled by the trustee for the benefit of the heirs. However, a “swap” power may be included, allowing the Grator to swap out assets, which can be tax advantageous.
Assets in the trust remain outside the taxable estate, but any unpaid promissory notes may be included.
Yes, when appropriately structured, an IDGT is a widely used and IRS-compliant estate planning strategy.
Yes, because the trust is considered a grantor trust, sales between the grantor and the trust do not trigger capital gains tax.
High-growth assets such as business interests, real estate, and appreciating investments provide the most tax benefits.
Best Alternatives to an Intentionally Defective Grantor Trust
If an IDGT is not the right fit, consider these alternatives:
- Grantor Retained Annuity Trust (GRAT) – Transfers appreciating assets with annuity payouts to the grantor.
- Dynasty Trust – Preserves family wealth for multiple generations while avoiding estate taxes.
- Spousal Lifetime Access Trust (SLAT) – Provides estate tax benefits while allowing spousal access to assets.
- Irrevocable Life Insurance Trust (ILIT) – Keeps life insurance proceeds outside of the taxable estate.
- Limited Liability Company (LLC) – Protects business or real estate assets while offering flexible control.
Each strategy offers distinct benefits tailored to your specific estate planning needs. Our team can help determine the best option for maximizing your wealth transfer strategy.
Protect and Transfer Wealth with an Intentionally Defective Grantor Trust
An Intentionally Defective Grantor Trust is one of the most powerful tools for transferring wealth tax-efficiently while maintaining control over assets. At SJF Law Group, we structure IDGTs to align with your financial and estate planning goals. Contact us today to create an IDGT that secures your legacy while minimizing taxes.
