Despite its name, an Intentionally Defective Grantor Trust can be useful in estate planning.
Not usually a word we like to hear.
Usually the word carries with it negative connotations.
Not so in the context of an Intentionally Defective Grantor Trust, also known as an IDGT.
According to a The Nevada Appeal article titled “What is an ‘IDGT?’,” this can be a useful tool for wealth transfer.
What is an Intentionally Defective Grantor Trust?
The name itself provides some guidance.
A grantor creates the trust.
The individual tax return for the grantor reports all deductions, credits and income.
The grantor trust does not need to file Form1041.
What is Form 1041?
This form is the income tax return specific to trusts and estates.
A grantor trust, or living trust, is revocable.
What does this mean?
The grantor can add or remove assets and alter terms of the trust.
The defective terms does not mean there is something wrong with it.
Rather it refers to how the trust will be taxed on trust income.
Why use an Intentionally Defective Grantor Trust?
You can use it to avoid gift taxes or estate taxes.
You can transfer wealth without transfer taxes.
What steps are usually taken?
The grantor will sell assets to the trust in exchange for a promissory note equal to the fair market value plus interest at the applicable federal rate.
When the grantor dies, the appreciation will go directly to beneficiaries of the trust while avoiding gift and estate tax liability.
The value of the note itself is included in the valuation of the estate.
This, like any other form of trust, is a complex estate planning tool.
Work with an experienced estate planning attorney to determine if an IDGT is appropriate for your personal circumstances.
So, how do you find an "experienced" estate planning attorney?
First, ask around. Friends, family and other professional advisors are trustworthy sources.
Second, conduct an "organic" search on "Google" for "estate planning" near you (e.g., "Estate Planning Anytown MoKan").
Third, either way, verify! Check out the education, experience, ratings and client reviews of any attorney before you contact him or her.
In fact, I use both of these services to thoroughly vett attorneys before referring members of our "client" family for legal help in other areas of law or for matters in jurisdictions outside Kansas or Missouri.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: Nevada Appeal (January 23, 2017) “What is an ‘IDGT?’”