Transferring assets to an intentionally defective grantor trust (IDGT) is a potentially powerful estate planning technique, allowing an individual to pass significant value to his or her intended beneficiaries transfer tax-free. Using this technique, the grantor makes a completed gift of assets to a trust for transfer tax purposes, removing the assets and any future appreciation thereon from the grantor’s estate, but retains ownership of the trust for income tax purposes, continuing to pay income tax on the income earned by the trust assets.
As a result, an IDGT offers a grantor the opportunity to supercharge a gift: the payment of income tax effectively constitutes additional tax-free gifts by the grantor to the trust beneficiaries. The trust assets are not reduced by tax payments, which, when compounded over years, may significantly impact the growth of trust assets, and the tax payments further reduce the grantor’s taxable base for estate tax purposes.
