Through an intentionally defective grantor trust (IDGT), you have a tool for estate planning that allows you to isolate your assets for all but income tax purposes.
"Intentionally defective" might seem counterintuitive, but the name refers to the fact that the trust allows you to continue to pay income taxes on the assets in the trust, but the trust remains frozen to estate taxes. This is the deliberate "defect" involved.
As of this writing, the IDGT is being considered for discontinuation. For that reason, 2022 may be the last year to obtain one.
How does it work?
Say you have several shares of stock, and their value has increased considerably over the period of your ownership. These shares also pay out dividends each year.
Were you to sell the stock to an IDGT, you might receive, in return, a 15-year promissory note, valued at roughly equivalent to the as-yet-untaxed gains on the stocks but also bearing interest of 3%.
You would pay income taxes, but there are circumstances in which you might realize estate tax savings if your stocks' dividends and appreciation are higher than the interest borne by the promissory note.
For this reason, IDGTs are probably best used during periods with lower inflation.
While IDGTs have benefits in certain economies, they can also potentially diminish your chances of incurring estate taxes upon death. You have the added benefits afforded to most trusts of avoiding direct taxation.
If you're interested in learning more, contact us about how an IDGT might work with your estate strategy.
Christi Shell, CWS®, AAMS®, BFA® is Managing Director of Wealth Management at Shell Capital since 2011 and has over 30 years of personal finance experience. Christi started her career after high school joining First Tennessee Bank in 1991, where she worked her way up to manager while also earning a B.S. in Organizational Management from Tusculum University. Christi later became manager of Regions Bank until she joined Shell Capital. Christi earned certifications of Certified Wealth Strategist®, Accredited Asset Management Specialist®, Certified ETF Advisor®, and Behavioral Financial Advisor™. She completed the prestigious Wealth Management Theory & Practice program at Yale University. Christi holds a Series 65 Investment Advisor license and helps clients with overall wealth management and financial planning.