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An Intentionally
Defective Grantor
Trust (IDGT) is one that
runs afoul of the
Grantor Trust Rules
under Sections 671
through 679 of the
Internal Revenue
Code. Any gifts to
an IDGT are
completed gifts for
gift tax purposes.
However, the gifts
are incomplete or
“defective” for
income tax purposes.
This means that the
grantor (creator of
the trust) would be
required to report
the income generated
by the trust assets
on his or her
personal income tax
return and pay the
income taxes on
behalf of the trust.
Thus, the assets in
the trust would grow
at an accelerated
rate without any
reduction for income
taxes. By creating
an IDGT, you can
substantially
leverage the amount
of assets that can
be passed out of the
estate without gift
tax costs.
As an example, if
you contributed
million to an IDGT that earned a
12% return, in 20
years, the assets
would grow to
approximately $9.6
million. The entire
value of the
appreciation would
be removed from the
grantor’s taxable
estate. This would
result in a
significant amount
of wealth you can
pass estate and gift
tax free to the next
generation. If the
trust paid its own
taxes, there would
only be $5 million
left in the trust
after the 20-year
term.
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