An Intentionally Defective Grantor Trust (IDGT) is a sophisticated estate planning tool that can offer significant benefits for high-net-worth individuals in Reno.
An IDGT is an irrevocable trust with a unique twist: it’s structured to be “defective” for income tax purposes while remaining effective for estate tax purposes. This intentional defect creates powerful opportunities for wealth transfer and tax planning.
Contact a knowledgeable trusts attorney with Cross Law Group today to discuss creating an intentionally defective grantor trust.
The process of creating an IDGT begins with establishing an irrevocable trust. This involves drafting a trust document that clearly outlines the terms of the trust, including the beneficiaries, the trustee’s powers, and the distribution rules. It’s crucial to work with an experienced estate planning attorney to ensure the trust document is properly drafted and executed because an irrevocable trust cannot be changed or amended.
To achieve the “intentionally defective” status for income tax purposes, the trust must include specific provisions that trigger grantor trust status under Internal Revenue Code sections 671-679. Common triggers include the power to substitute trust assets with assets of equivalent value and the power to borrow from the trust without adequate security. Including these provisions ensure that the grantor remains responsible for the trust’s income taxes while the trust assets are excluded from the grantor’s estate for estate tax purposes.
An IDGT also needs proper funding, and there are two main ways to do this: making a gift to the trust or selling assets to the trust. Gifting assets to the trust is the most straightforward option, but may use up all or part of the grantor’s lifetime gift tax exemption. Selling assets to the trust in exchange for a promissory note allows for the transfer of large amounts of assets without triggering gift taxes. The grantor also receives an income stream in the form of interest payments on the promissory note. Regardless of the method, appreciating assets are most commonly used to fund an IDGT because the future growth of the assets will occur outside of the grantor’s taxable estate, thereby avoiding estate taxes.
The primary benefit of an Intentionally Defective Grantor Trust is the ability to remove assets from the grantor’s taxable estate. When you transfer assets to an IDGT, you effectively freeze their value for estate tax purposes. Any future appreciation occurs outside your estate, potentially resulting in substantial estate tax savings. This feature is particularly valuable for assets expected to appreciate significantly over time, such as real estate or business interests.
Another unique characteristic of IDGTs is that the grantor remains responsible for paying income taxes on the trust’s earnings. While this might initially seem unfavorable, it actually provides a significant benefit. The payment of these taxes is not considered a gift for tax purposes, allowing you to effectively make tax-free gifts to the trust beneficiaries. By paying the income taxes, you’re reducing your taxable estate even further, while allowing the trust assets to grow undiminished by tax obligations.
IDGTs in Nevada can also be structured to allow the grantor to be a potential beneficiary of the trust. This feature provides a safety net, ensuring that you can access the trust assets if needed in the future. The ability to retain some access to the trust assets can provide peace of mind, especially when transferring substantial wealth. However, it’s important to note that the extent of the grantor’s access to the trust must be carefully limited to avoid undermining the estate tax benefits of the IDGT. Given the complexity of these trusts and the need to carefully balance their various features, it’s crucial to work with experienced legal and tax professionals when considering and implementing an IDGT as part of your estate plan.
Call a dedicated trusts & estates lawyer for more on the benefits of opening an IDGT trust and how to initiate the process.
With significant advantages and minimal risks, creating an IDGT trust in Reno is a powerful way to freeze your estate and protect the financial future of your loved ones.
Although comprehensive planning and proper legal drafting are critical to creating a successful IDGT, those who have estates which are more substantial than the lifetime exemption can utilize this tool to reduce their tax exposure.
Talk to a reliable lawyer today about creating an intentionally defective grantor trust. Our seasoned legal professionals can help you solidify the estate planning process and advise you on the best course of action to protect your valuable assets.
