Through an intentionally defective grantor trust (IDGT), you have a tool for estate planning that allows you to isolate your assets for all but income tax purposes.
“Intentionally defective” might seem counterintuitive, but the name refers to the fact that the trust allows you to continue to pay income taxes on the assets in the trust. Still, the trust remains frozen to estate taxes. This is the deliberate “defect” involved.
As of this writing, the IDGT is being considered for discontinuation. For that reason, 2022 may be the last year to obtain one.
How does it work?
Say you have several shares of stock, and their value has increased considerably over the period of your ownership. These shares also pay out dividends each year.
Were you to sell the stock to an IDGT, you might receive, in return, a 15-year promissory note, valued at roughly equivalent to the as-yet-untaxed gains on the stocks but also bearing interest of 3%.
You would pay income taxes, but there are circumstances in which you might realize estate tax savings if your stocks’ dividends and appreciation are higher than the interest borne by the promissory note.
For this reason, IDGTs are probably best used during periods with lower inflation.
While IDGTs have benefits in certain economies, they can also potentially diminish your chances of incurring estate taxes upon death. You have the added benefits afforded to most trusts of avoiding direct taxation.
If you’re interested in learning more, talk to one of our wealth experts or your trusted estate planning professional about how an IDGT might work with your estate strategy.
Spectrum Wealth Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Additional information about Spectrum’s investment advisory services is found in Form ADV Part 2, which is available upon request. The information presented is for educational and illustrative purposes only and does not constitute tax, legal, or investment advice. Tax and legal counsel should be engaged before taking any action. The opinions expressed and material provided are for general information and should not be considered a solicitation for purchasing or selling any security.