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Intentionally Defective Grantor Trust Tax Return

Avoid paying gift taxes, estate taxes and probate

Making use of an IDGT will provide many tax benefits to both the grantor as well as their heirs. The trust will be able to provide unparallel asset protection while reducing amount of estate and gift taxes that would have been required to be paid.

Understanding Defective Grantor-Type Irrevocable Trusts & Tax Returns

There are many ways of implementing an Intentionally Defective Grantor Trust (IDGT) that can provide ultimate benefits. Intentionally Defective Grantor Trusts can be used by any individual seeking to:
  1. Asset protect real estate
  2. Optimize taxes on the sale of any highly appreciated assets
  3. Transfer assets in your estate in a way that will provide tax benefits and minimize estate and gift taxes
  4. Buy and hold a life insurance policy within an irrevocable trust to help pay any additional estate taxes
In order to successfully utilize an Intentionally Defective Grantor Trust, we must completely understand what this type of trust is and how it can provide multiple benefits. The Intentionally Defective Grantor Trust is an irrevocable trust that is created with the intention of benefitting beneficiaries of the trust owner. The grantor's children will receive the benefits from the trust. The trust is created in a specific manner so that it will provide benefits to the descendants of the grantor's children later down the road.

What is "Defective" in the Intentionally Defective Grantor Trust?

An Intentionally Defective Grantor Trust is specifically designed to defect income taxes. Meaning the IRS has stated, for income tax purposes, the trust is tax neutral. The grantor or the irrevocable trust is required to pay income or capital gains taxes. While intentionally defective for tax purposes, Intentionally Defective Grantor Trust will also be an extremely effective tool for asset protection and estate taxes because the assets in the trust are owned by the trust and therefore it is not part of your estate. However, upon the death of the grantor, the assets in trust will stay in the trust or be passed to beneficiaries without any estate taxes.

Gifting Directly to an Intentionally Defective Grantor Trust

By using tools to transfer assets into the irrevocable trust, assets can be put into the trust in a way that legally avoids gift and capital gains taxes. An individual can gift assets which will work like any other gifting situation in that the gift tax exemption will be elected on their gift tax return. With an Intentionally Defective Grantor Trust, there is a unique point to note. In regards to the estate taxes, the gifting of assets will be considered complete (i.e. the individual avoids paying estate taxes); however, it is a pass through or income tax neutral when it comes to the payment of income taxes (i.e. the grantor will have to pay incomes taxes on the income of the trust).

Sale of Assets to the Intentionally Defective Grantor Trust

These trusts are very often used when individuals want to sell assets to the trust instead of simply gifting the assets. You may ask why anyone would want to sell assets to the defective irrevocable trust. There are various arguments for selling assets to the trust, and the most common reason is because the individual is ultimately searching for a way to transition an asset in a way that is not gift taxable or they want to avoid a fraudulent conveyance. There are also ways one could exchange the assets into the irrevocable trust that are more tax efficient. Usually the asset is a business owned by the family and the individual wishes to pass this business to his beneficiaries. The owner of the assets usually also seeks to keep all income in order to meet the income taxes that will be due on income generated from the defective irrevocable trust. This will effectively result in the generation of an income stream in retirement.

Family Limited Partnership: Decrease Value of Asset Transferred

There are occasional instances when it will be more beneficial to combine a family limited partnership with an irrevocable trust. Some individuals will try to find a way to maximize economic benefits of the trust and they will have the ability to use a family limited partnership at the same time. To describe family limited partnership can be used with an irrevocable trust to reduce the value of assets.

Intentionally Defective Grantor Trust Tax Benefits

A portion of assets from the estate can be transferred to the Intentionally Defective Grantor Trust without incurring any gift taxes. The assets now in the Intentionally Defective Grantor Trust will pass on to heirs and beneficiaries without estate taxes.
When this is all planned correctly, the grantor will have the option of paying the income taxes that are due on the Intentionally Defective Grantor Trust with the money that has been gained from payments being made in accordance with the installment note. The income taxes that are being paid will be done so without gift taxes. This may not seem great from a tax perspective in the beginning, but it is an exceptional planning tool that can bypass gift taxes and can pass many tax blessings to heirs.
Please contact Estate Street Partners at (888) 938-5872 for more information on the Intentionally Defective Grantor Trust and how you can protect your assets with our top Ultra Trust® irrevocable trust plan.



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