An intentionally defective grantor trust (IDGT) is a popular estate planning tool that allows individuals to transfer assets to their heirs while minimizing gift and estate taxes. Connecticut residents considering their estate planning options should be aware of how an IDGT works and the benefits and drawbacks of such a financial tool.
About intentionally defective grantor trusts
IDGTs is a type of irrevocable trusts that are “defective” for income tax purposes but not for estate and gift tax purposes. This means that the trust is not subject to income tax, but the grantor is still responsible for paying taxes on the income generated by the trust. The grantor retains some control over the trust, such as the ability to make decisions regarding the trust’s investments.
How does an IDGT work?
The grantor creates the IDGT and transfers assets to the trust. The trust becomes the owner of the assets and is responsible for managing them.
The grantor retains some control over the trust, such as replacing the trustee and making decisions regarding the trust’s investments. The same person is also responsible for paying taxes on the income generated by the trust.
The beneficiaries of the trust are typically the grantor’s heirs. The assets in the trust are transferred to the beneficiaries when the grantor passes away.
Benefits of an IDGT
One of the primary benefits of an IDGT is that it allows the grantor to transfer assets to their heirs while minimizing gift and estate taxes. Because the assets in the trust are not subject to estate taxes, the heirs receive more of the assets. Additionally, the assets can grow without being subject to income tax, increasing the value of the assets transferred to the heirs.
Another benefit of an IDGT is that it allows the grantor to retain some control over the assets in the trust. The grantor can make decisions regarding the trust’s investments and can even replace the trustee if necessary.
Drawbacks of an IDGT
One of the drawbacks of an IDGT is that it is irrevocable. Once the assets are transferred to the trust, the grantor cannot change their mind and take them back. This means the grantor must be certain they want to transfer the assets to the trust.
Another drawback of an IDGT is that the grantor is responsible for paying taxes on the income generated by the trust. This can be a sizable expense, especially if the trust generates significant income.
Estate planning with an IDGT
An intentionally defective grantor trust is a valuable estate planning tool to help individuals transfer assets to their heirs while minimizing gift and estate taxes. It allows the grantor to retain some control over the assets in the trust, while also allowing the assets to grow without being subject to income tax. However, an IDGT is irrevocable, and the grantor is responsible for paying taxes on the income generated by the trust, which are important factors to consider when deciding whether an IDGT is right for you.