Bay Area Estate And Tax Planning Law Firm

Using an IDGT: What and why

On Behalf of | Dec 14, 2021 | Estate Planning, Trusts |

Trustors use an IDGT to isolate specific trust assets. This is in order to segregate estate tax from income tax. The Intentionally Defective Grantor Trust is a trust used with deliberate and purposeful intent to protect assets.

Maximizing next-generation assets

IDGTs usually come into play as an option for outright gifting. With assets transferred into the IDGT, IDGTs are essentially set up for the benefit of a descendant. The transfer might be an offering for federal transfer tax purposes. Using the value of transferred assets, the transaction reduces available estate- and gift-tax exemption. Essentially, assets are available to beneficiaries without estate tax.

Protection of assets

A major objective of estate planning is ensuring assets are outside the reach of potential creditors. The IDGT offers significant asset protection from debt claims, even in the event of a spouse in a divorce. Protection applies as long as any transfer is not effectuated to defraud creditors.

The power of the swap

A great benefit of the IDGT is, as an irrevocable trust, the grantor can switch out trust assets of equal value. Unfortunately, the instrument is also viewed as a shortcoming. Critics see the cost basis of assets in the trust not meeting fair market value upon the grantor’s passing.

To step up on appreciated IDGT assets upon the grantor’s passing, the grantor has to exercise the power of substitution. That swaps one asset with another asset, usually cash, that’s the equivalent value at the time of execution.

The IDGT is a resource for safeguarding wealth, a planning tool to aid efforts to preserve and maximize assets for beneficiaries. It also minimizes estate taxes and protects assets. Perform your due diligence and find the best ways to utilize the financial instrument. The advantages of a customized IDGT may be ideal for your estate planning.