Intentionally defective grantor trusts have become a popular estate planning tool in Connecticut. They allow you to transfer assets to your children or other beneficiaries while minimizing the amount of gift and estate taxes that will be due. If you are looking to create one for your loved ones, here’s what you need to know.
What is an intentionally defective grantor trust (IDGT)?
IDGT is an estate planning tool where a grantor or settlor (the person that owns the property) relinquishes their ownership of their assets for estate purposes, but they still remain the owner of the trust for income tax purposes. In other words, you only pay taxes for the income generated by your estate and not for the estate itself. This allows your assets to grow tax-free, thus avoiding estate and gift taxation.
How IDGTs work
As defined, IDGT is created when you transfer assets to a trust but retain the right to use those assets for your own benefit. This allows you to avoid paying gift taxes on the transferred assets since they are still considered yours (you own the trust). However, once you die, the trust becomes irrevocable, and the successor trustee that you named takes over and distributes your assets to your beneficiaries.
Irrevocable trust takes your name out of your assets and puts them in the trust’s name. This transfer of ownership saves your property from the 40% federal estate tax that the IRS would have imposed on all your assets exceeding the federal estate tax exemption. Keep in mind that Connecticut also has an estate tax exemption which is at $9,100,000 as of writing this.
Benefits of IDGT
- It keeps your assets out of the taxable estate after you pass
- It helps your loved ones receive greater amounts of inheritance
- It minimizes the tax burden on your heirs
- It protects and preserves your wealth
Creating an intentionally defective grantor trust is one of the best ways to transfer your assets to your heirs and loved ones. If you have an asset that you believe will greatly appreciate in value over time, keep it in an IDGT as soon as you can.