Learn from the past, set vivid, detailed goals for the future, and live in the only moment of time over which you have any control: now.

– Denis Waitley

Divorce • Family law • estate planning
Experienced family law and estate planning representation:

The use of an intentionally defective grantor trust

An estate planning vehicle that has attracted much attention is the use of an intentionally defective grantor trust (IDGT). A grantor trust is a trust that the grantor, or in some instances, a beneficiary, is regarded as the owner for income tax purposes. This means that the owner will be subject to all income tax consequences.

Because the estate and gift tax rules do not coincide with the income tax rules, it is possible to establish a trust that is irrevocable and a completed gift for gift and estate tax purposes without eliminating the income tax benefits and disadvantages. Therefore, the transfer of wealth to the next generation(s) is completed once the trust is funded. However, the income tax on the trust income continues to be the responsibility of the grantor.

For estate tax purposes, the value of the grantor’s estate is lowered by the amount of the asset transfer. The grantor will sell assets to the trust in return for a promissory note of some definite time period, such as 10 or 15 years. The note will pay sufficient interest to categorize the trust as above market; however, the underlying assets are expected to increase in value at a more rapid rate.

Due to this tax structure, transactions, including the sale of property, between the grantor and the IDGT, are disregarded for income tax purposes, and income tax consequences, including capital gains, can be avoided. Another advantageous result is that the grantor receives the benefit of all deductions and credits due to the trust.

In the majority of the estate planning uses of the IDGT, the grantor will assume ownership of the trust for income tax purposes. Among the trust terms that would render an irrevocable trust defective for income tax purposes are the power of the grantor to:

1. Borrow from the trust without sufficient interest or security
2. Borrow trust funds without the duty to pay back principal in the same tax year
3. Replace trust property with property of equivalent value while possessing such powers as a nonfiduciary

If you are considering creating a trust, or have questions or concerns regarding estate planning, call the McDevitt Law Firm.

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