What is an Intentionally Defective Grantor Trust, and Could it Be Right for You?
An Intentionally Defective Grantor Trust (IDGT) is a type of irrevocable trust, generally created for the benefit of the grantor’s spouse, children, and/or grandchildren. This type of trust exploits a tiny loophole between estate law and income tax law that allows the trust to be a fully irrevocable grantor trust for estate law purposes, while being strategically defective for Income Tax purposes. Essentially, the result is a trust full of frozen assets that the grantor pays income taxes on, allowing the trust to grow without having income taxes deducted directly from its assets, and ultimately to be passed on to the grantor’s beneficiaries without the gift-tax, which otherwise would also come out of the trust, and can be as high as 40%. In that respect, an IDGT can be an effective way of significantly lowering your total estate taxes and maximizing your estate for your beneficiaries.
Benefits versus Drawbacks
You’ve already heard about some of the benefits of an IDGT—for instance, maximizing the assets you’ll be able to pass on to your family and minimizing your total estate taxes. The biggest possible drawback when it comes to considering an IDGT is whether you’ll have a source of income separate and apart from the IDGT to pay the income taxes on it. Trusts and estates lawyers report that this is one of the most common issues that comes up in regard to continuing to operate these trusts. However, if you have enough cash on hand or a separate income-generating trust, this will not be a problem. Further, IDGTs are actually very flexible. If you work with an experienced Florida trusts and estates attorney, they will be able to tell you your options when it comes to planning for and implementing an Intentionally Defective Grantor Trust.
One additional benefit of this type of trust is how flexible it is. For instance, depending on your circumstances, you may be able to switch the trust back to a grantor trust, which would effectively eliminate your obligation to pay taxes on the trust. While this option would generally be examined in the event that you no longer want to or were able to pay income taxes on the trust, it could also potentially be done to avoid paying taxes out of pocket on a large capital gain for the trust—switching the trust’s status to grantor status would mean that the income taxes on the large capital gain would come out of the trust’s proceeds.
Contact a Florida Trusts and Estates Attorney
One thing is for sure, if you are considering an Intentionally Defective Grantor Trust, it is important to talk to an experienced Tampa estate planning attorney as soon as possible. These trusts are highly complex and specialized, so it’s critical that you have an attorney who is experienced with all the ins and outs of estate planning, and who knows how to protect your assets and ensure that your wishes are honored. Contact the offices of David Toback to schedule a consultation.