We use cookies to improve security, personalize the user experience,
enhance our marketing activities (including cooperating with our marketing partners) and for other
business use.
Click "here" to read our Cookie Policy.
By clicking "Accept" you agree to the use of cookies. Read less
Understanding the Intentionally Defective Grantor Trust (IDGT) and Its Benefits
Definition & Meaning
An intentionally defective grantor trust (IDGT) is a specific type of irrevocable trust where the grantor retains significant control over the trust's assets. For income tax purposes, the trust is treated as if it is the same entity as the grantor, meaning any income generated by the trust is taxable to the grantor. However, for estate tax purposes, the trust is considered separate from the grantor's estate. This dual treatment arises because the trust is designed to intentionally violate certain grantor trust rules set forth in the Internal Revenue Code, specifically sections 671 to 677. Despite the grantor's tax obligations, the trust's assets are not included in the grantor's estate for estate tax calculations.
Table of content
Legal Use & context
IDGTs are commonly used in estate planning to manage wealth transfer while minimizing estate taxes. They are particularly relevant in the context of estate law and tax law. Legal practitioners often utilize IDGTs to help clients preserve their wealth for future generations while ensuring tax efficiency. Users can manage some aspects of IDGTs through legal templates available from resources like US Legal Forms, which provide guidance on setting up such trusts.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A wealthy individual establishes an IDGT to transfer ownership of a family business to their children while retaining control over the business operations and tax liability. This allows the grantor to manage the business without it being included in their estate for tax purposes.
Example 2: A person sets up an IDGT to hold real estate investments. They continue to pay taxes on the income generated by the trust while ensuring that the properties are not subject to estate taxes upon their death. (hypothetical example)
Relevant laws & statutes
The primary legal framework governing IDGTs includes the Internal Revenue Code, specifically sections 671 through 677, which outline the rules for grantor trusts. Additionally, sections 2035 to 2042 detail the estate tax implications of gifts and transfers to trusts.
Comparison with related terms
Term
Definition
Key Differences
Grantor Trust
A trust where the grantor retains certain powers, making the income taxable to them.
IDGTs are intentionally defective for tax purposes, while grantor trusts may not be.
Irrevocable Trust
A trust that cannot be modified or terminated by the grantor.
IDGTs are a type of irrevocable trust specifically designed for tax strategies.
Common misunderstandings
What to do if this term applies to you
If you are considering setting up an IDGT, it is advisable to consult with an estate planning attorney who can provide personalized guidance. You can also explore US Legal Forms for templates and resources to help you create an IDGT that meets your needs. If your situation is complex, professional legal assistance may be necessary to navigate the intricacies of tax law and estate planning.
Find the legal form that fits your case
Browse our library of 85,000+ state-specific legal templates.