Intentionally Defective Grantor Trust (IDGT)

An Intentionally Defective Grantor Trust (IDGT) is a type of trust that is created with the intent of being taxed at the grantor's (creator's) tax rate. This is in contrast to a regular grantor trust, which is taxed at the trust's tax rate.

There are a few reasons why someone might want to create an IDGT. One reason is to reduce the amount of taxes that are paid on the trust's income. This can be done by allocating the trust's income to the grantor, who is likely in a lower tax bracket than the trust would be.

Another reason for creating an IDGT is to protect assets from creditors. If the trust is created properly, the assets in the trust will be protected from the grantor's creditors. This can be a valuable asset protection tool for high-net-worth individuals.

There are also some disadvantages to creating an IDGT. One disadvantage is that the grantor may be required to pay income taxes on the trust's income, even if the grantor does not receive any distributions from the trust. This can be a significant burden if the trust generates a lot of income.

Another disadvantage of an IDGT is that the grantor may lose control over the trust's assets. This is because the grantor is still considered to be the owner of the trust for tax purposes, even though the trust is a separate legal entity. This can make it difficult for the grantor to make changes to the trust or to remove assets from the trust.

Overall, an IDGT can be a valuable tool for estate planning and asset protection. However, it is important to understand the pros and cons of an IDGT before making a decision about whether or not to create one.

Here are some additional details about Intentionally Defective Grantor Trusts:

• IDGTs are often used to hold assets that are expected to appreciate in value, such as real estate or stocks. This is because the appreciation in value of the assets will be taxed at the grantor's tax rate, which is likely to be lower than the trust's tax rate.
• IDGTs can also be used to provide income for the grantor's beneficiaries. However, it is important to note that the grantor may be required to pay income taxes on the trust's income, even if the grantor does not receive any distributions from the trust.
• IDGTs can be a valuable asset protection tool for high-net-worth individuals. This is because the assets in the trust will be protected from the grantor's creditors. However, it is important to note that the grantor may lose control over the trust's assets.
• IDGTs are complex legal structures and should only be created with the advice of an experienced estate planning attorney.