INTENTIONALLY DEFECTIVE GRANTOR TRUST
Back to GlossaryDefinition
An estate-planning tool used to freeze certain assets of an individual for estate-tax purposes, but not for income-tax purposes. It is effectively a grantor trust with a purposeful flaw that ensures the individual continues to pay income taxes.
Summary
An Intentionally Defective Grantor Trust (IDGT) is a sophisticated estate planning strategy where a grantor creates a trust that is deliberately 'defective' for income tax purposes but valid for estate and gift tax purposes. This means the grantor continues to pay income taxes on the trust's earnings (the 'defective' part), which effectively transfers additional wealth to beneficiaries tax-free while removing the trust assets from the grantor's estate for estate tax purposes.
Usage Context
Critical for understanding advanced estate planning strategies, particularly when studying wealth transfer techniques for high-net-worth individuals and strategies to minimize estate taxes while maximizing benefits to heirs.
Common Confusions
- Thinking 'defective' means the trust is broken or invalid
- Confusing income tax treatment with estate tax treatment
- Believing the grantor has control over trust assets after transfer
- Assuming all grantor trusts are intentionally defective
- Misunderstanding that the 'defect' is actually beneficial for wealth transfer
