Intentionally Defective Grantor Trusts (IDGTs)

Intentionally Defective Grantor Trusts are typically used in conjunction with the Trustmaker selling assets to an irrevocable grantor trust.  This technique works to freeze, or set the value, of the property sold to the trust in exchange for a promissory note payable from the Trust to the Trustmaker.  The transaction helps to pass an asset in a gift tax free manner from the Trustmaker down to the beneficiaries of the trust. 

Through the use of an IDGT, the Trustmaker is able to transfer a portion of the Trustmaker’s assets out of his estate and save on estate taxes, without the imposition of substantial gift taxes or the use of the Trustmaker’s gift tax exemptions. Any appreciation in the assets in the IDGT will also pass estate tax free.  Further, the payment of income taxes by the Trustmaker on the income generated by the trust assets is done without gift tax consequences, and is a good planning technique to transfer more wealth out of the Trustmaker’s estate for the benefit of the beneficiaries of the trust.

While an Intentionally Defective Grantor Trust typically involves the sale of assets to the IDGT, the Trustmaker can also make an outright gift to an IDGT using the Trustmaker’s gift tax exemptions.  The general consensus is that the IDGT should have assets worth a minimum of ten percent of the value of the assets being sold to the trust, and a gift to the trust can help to ensure that the Intentionally Defective Grantor Trust is respected by the Internal Revenue Service.

Based in Raleigh, North Carolina we assist clients throughout Wake County, NC and Johnston County, NC as well as the cities of Cary, NC, Morrisville, NC, and Clayton, NC.

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