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What is the objective of an intentionally defective grantor trust?

On Behalf of | Dec 12, 2022 | Estate Planning, Trusts |

An intentionally defective grantor trust (IDGT) is a tax planning strategy for states which is used to transfer assets to beneficiaries while minimizing gift and estate taxes in Maryland. IDGTs are complex trusts that are often used in conjunction with other trusts, such as life insurance trusts or qualified personal residence trusts. While an IDGT can be a useful tool for reducing taxes, it’s important to understand how they work before establishing one.

How does an IDGT work?

An IDGT is designed to minimize or eliminate federal estate taxes. The grantor, who is also the trustee, transfers property to the trust. The trust is an irrevocable trust. This trust then makes payments to beneficiaries, which are typically family members. The payments can be made either during the grantor’s lifetime or after death.

The key to an IDGT’s success is that the grantor powers over the trust property. This includes:

  • The power to revoke or change the trust
  • The power to name and remove trustees
  • The power to make distributions from the trust

By retaining these powers, the grantor ensures that the IRS will not treat the transfer of property to the trusts as a completed gift for tax purposes.

The result is that any appreciation in the value of the trust property is not subject to gift or estate taxes. This can be significant savings, especially if the property is expected to appreciate significantly in value over time.

What are the advantages of an IDGT?

The main advantage of an IDGT is that it can minimize or eliminate estate taxes. This is because the assets in the trust are not included in the grantor’s estate.

Another advantage of an IDGT is that it can help to protect the assets in the trust from creditors. This is because the grantor has no legal ownership of the assets in the trust, and therefore creditors cannot reach them.

Finally, an IDGT can provide flexibility in how the assets in the trust are distributed. This can be beneficial if, for example, you want to give to different beneficiaries in different ways.