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.
|||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 .
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 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.
