Intentionally Defective Grantor Trust - IDGT

DEFINITION of 'Intentionally Defective Grantor Trust - IDGT'

An estate planning tool used to freeze certain assets of an individual for estate tax purposes, but not for income tax purposes. The intentionally defective trust is created as a grantor trust with a purposeful flaw that ensures that the individual continues to pay income taxes, as income tax laws will not recognize that assets have been transferred away from the individual.

For estate tax purposes, however, the value of the grantor's estate is reduced by the amount of the asset transfer. The individual will "sell" assets to the trust in exchange for a promissory note of some length, such as 10 or 15 years. The note will pay enough interest to classify the trust as above market, but the underlying assets are expected to appreciate at a faster rate.

BREAKING DOWN 'Intentionally Defective Grantor Trust - IDGT'

The beneficiary of an IGDT is typically children or grandchildren, who will receive assets that have been able to grow without reductions for income taxes (which have been paid by the grantor).

The IDT can be a very effective estate planning tool if structured properly, allowing a person to lower his or her taxable estate while gifting assets to beneficiaries at a locked in value. The grantor (creator) of the trust can also lower his or her taxable estate by paying income taxes on the trust assets, essentially gifting extra wealth to beneficiaries.

An IDT should be structured with the assistance of a certified financial planner and/or estate planning attorney.

RELATED TERMS
  1. Estate Planning

    The collection of preparation tasks that serve to manage an individual's ...
  2. Taxable Estate

    The total value of a deceased person's assets that are subject ...
  3. Revocable Trust

    A trust whereby provisions can be altered or canceled dependent ...
  4. Estate Freeze

    An asset management strategy whereby an estate owner aims to ...
  5. Certified Financial Planner - CFP

    The CFP legal team has provided its official definition, along ...
  6. Fiduciary

    A fiduciary is a person who acts on behalf of another person, ...
Related Articles
  1. Retirement

    Establishing A Revocable Living Trust

    This arrangement allows you to have more control over your estate - both before and after your death.
  2. Options & Futures

    Getting Started On Your Estate Plan

    With some preparation, you can save your heirs from paying a hefty estate tax. Here are some tips.
  3. Retirement

    Skipping-Out on Probate Costs

    Don't let bad estate planning lead to unnecessary costs and stress for your inheritors.
  4. Options & Futures

    Your Will: Why You Need A Power Of Attorney And Beneficiaries

    What would happen if you were suddenly unable to manage your financial affairs? Preparation is the best protection.
  5. Estate Planning

    Estate Planning: 16 Things To Do Before You Die

    If you don’t plan your estate, your surviving family may have to deal with disputes and probate that were avoidable.
  6. Your Practice

    Advisors: $240B in Fees Up for Grabs by 2030

    Advisors have an opportunity to win generational assets over the next 15 years. Here are some tips on how to cater to different demographics.
  7. Personal Finance

    Want Your Will to Prevail? Don't Die Intestate

    If you die without making a last will and testament, you are said to have died intestate. What happens to your assets in this case?
  8. Your Clients

    When to Trust a Revocable Trust

    Unsure of how your assets will be dispersed once you're gone? Here's how setting up a revocable trust while you're here can be a big benefit.
  9. Retirement

    Your Retirement-Planning Team

    As you accumulate wealth, retirement planning can be too complex for just one person. The right team can help you avoid headaches and reach your goals.
  10. Personal Finance

    How Survivorship Life Insurance Works

    Should you buy a survivorship life insurance policy?
RELATED FAQS
  1. Are estate planning fees tax deductible?

    Estate planning fees may be tax deductible, but only if certain conditions have been met. Internal Revenue Service (IRS) ... Read Full Answer >>
  2. Can personal loans be included in bankruptcy?

    Personal loans from friends, family and employers fall under common categories of debt that can be discharged in the case ... Read Full Answer >>
  3. How much money does Texas make from unclaimed property each year?

    In 2014, the office of the Texas Comptroller of Public Accounts reported $234 million in unclaimed property claimant liabilities, ... Read Full Answer >>
  4. How much money does Michigan make from unclaimed property each year?

    According to the 2013-2014 Annual Report of the State Treasurer, the state of Michigan earned only $82,875 in abandoned and ... Read Full Answer >>
  5. Who decides if a financial security should be escheated?

    There is no one entity who "decides" to escheat assets. Rather, financial institutions are required to report inactive accounts ... Read Full Answer >>
  6. Will 529A plans replace special needs trusts?

    529 ABLE plans, also known as 529A plans, are state-sponsored accounts authorized by Congress that allow people with disabilities ... Read Full Answer >>
Hot Definitions
  1. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  2. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  3. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  4. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
  5. Godfather Offer

    An irrefutable takeover offer made to a target company by an acquiring company. Typically, the acquisition price's premium ...
Trading Center