Irrevocable Grantor Trusts

Irrevocable grantor trusts come in many forms and can be a great tool to remove assets from one’s estate and limit the taxation of assets. A grantor trust is any trust over which the grantor or other owner retains the power to control or direct the trust’s income or assets. Irrevocable grantor trusts can be used with business planning tools, such as LLC’s to remove assets from an individual’s estate and minimize taxation at death. The trust has the same features as the revocable living trust, which is a grantor, trustee, beneficiaries and a transfer of assets, but the trust is irrevocable (or unable to be modified after execution).

An intentionally defective grantor trust (also known as the “IDGT” or “DGT”) is one such trust. An intentionally defective grantor trust is a trust where a complete transfer of assets occurs, however, the transfer is an incomplete, or “defective,” transfer for income tax purposes.

Defective Grantor Trusts are commonly used where an individual has a large grossing business and/or extensive real estate property. For instance, if you own property that has appreciated in value and that make you near the 5.4 million dollar estate value, you may want to use the IDGT in your estate planning. That is because, whether you sell your property or keep it until death, you will have to pay taxes. Specifically, you will have to pay taxes on the gain or pay taxes at your death. However, if you sell your property to an intentionally defective grantor trust, then the completed transfer removes the property from your estate and if properly structured, you can avoid gift and estate taxes. After your death, the intentionally defective grantor trust can transfer your property to your children or other family members.

Learn more about the most common irrevocable trusts:

Learn more about the different estate planning strategies:

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