If you have a great deal of wealth you may have taken various measures to protect and save your assets for your heirs through various estate planning techniques. For example, you may decide to hold your assets in a living trust for future generations. However, if you transfer a large sum of assets into a trust in one transaction, you may be subject to gift liability. One way to resolve this dilemma is through the establishment of an intentionally defective grantor trust (IDGT).
What are the tax advantages of an IDGT?
An IDGT is an irrevocable trust that is designed in a manner that prevents assets placed in the trust from being taxable to the grantor. Thus, the grantor of an IDGT will not be subject to the gift tax, federal estate tax or generation-skipping transfer tax.
However, IDGTs do not protect against all taxes. The grantor still is required to pay income tax on any profits made through the investment of trust assets or through deductions and/or credits coming from the trust. However, since the grantor is paying these taxes each year, it means that the grantor’s beneficiaries will not need to pay gift taxes, and the assets in the trust can continue to accumulate tax-free.
How are assets transferred to an IDGT?
One recommended means for transferring assets into a IDGT is to combine a nominal gift with an installment sale of the assets. For example, 10% of the asset can be gifted to the trust, and the remaining 90% can be transferred to the trust through installment sale payments.
IDGTs are not the only means for avoiding taxation
IDGTs are one means for avoiding taxation, but there are other methods that achieve this goal that this post does not cover. Ultimately, if you are concerned about the taxation of your estate, you can seek the assistance of a professional in Greenwich who can explain your legal options so you can make knowledgeable decisions on how to transfer your estate.