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An Intentionally Defective Grantor Trust (IDGT), also referred to as a grantor retained annuity trust (GRAT), is an irrevocable trust agreement established between a grantor (the person setting up a trust) and a trustee. Established by the grantor, an IDGT allows the grantor to transfer assets to a trust account managed by the trustee, while at the same time reserving the right to receive an annuity payment from the trust for a period of time. This type of trust is specifically designed to take advantage of the trust's income tax status as an "intentionally defective grantor trust," and exploit tax savings, as the grantor continues to pay income taxes on the same or a similar amount earned from the trust.
An IDGT is particularly beneficial when transferring assets to children or grandchildren. It's an effective estate planning tool for the grantor, who can transfer assets to a trust where the assets may not be taxed at estate levels, but rather taxed at the lower income levels paid by the beneficiary. Tax deferment is also achieved, as the asset growth experienced in the trust while the assets are being held there escapes being hit with the capital tax gains.
The estate of the grantor can also benefit from the use of an IDGT, as the trust assets are excluded from the total count of estate value when calculating the estate tax. This helps to ensure that the recipient of the trust will not be hit with any crippling taxes when the trust is eventually passed to them.
The process of setting up an IDGT is complex and requires the help of an experienced estate lawyer, but essentially it involves transferring the assets the grantor wants to the trust, making sure all taxes on the assets are paid, and carving out the trustee and an annuity payment to the grantor from the trust's assets. The annuity payment can be set at any amount, as long as it does not exceed the life expectancy of the grantor.
For those looking for an effective way to preserve assets and minimize both income and estate taxes, an intentionally defective grantor trust is an effective and legally sound solution. While the setup of the trust can be complex and may require the help of an attorney, the long term benefits are worth the effort.
An IDGT is particularly beneficial when transferring assets to children or grandchildren. It's an effective estate planning tool for the grantor, who can transfer assets to a trust where the assets may not be taxed at estate levels, but rather taxed at the lower income levels paid by the beneficiary. Tax deferment is also achieved, as the asset growth experienced in the trust while the assets are being held there escapes being hit with the capital tax gains.
The estate of the grantor can also benefit from the use of an IDGT, as the trust assets are excluded from the total count of estate value when calculating the estate tax. This helps to ensure that the recipient of the trust will not be hit with any crippling taxes when the trust is eventually passed to them.
The process of setting up an IDGT is complex and requires the help of an experienced estate lawyer, but essentially it involves transferring the assets the grantor wants to the trust, making sure all taxes on the assets are paid, and carving out the trustee and an annuity payment to the grantor from the trust's assets. The annuity payment can be set at any amount, as long as it does not exceed the life expectancy of the grantor.
For those looking for an effective way to preserve assets and minimize both income and estate taxes, an intentionally defective grantor trust is an effective and legally sound solution. While the setup of the trust can be complex and may require the help of an attorney, the long term benefits are worth the effort.