What is an Intentionally Defective Grantor Trust?
An Intentionally Defective Grantor Trust (“Defective Trust”), generally is an irrevocable trust created for the benefit of one?s children and grandchildren which is complete for gift and estate tax purposes, but “defective” for income tax purposes because the Grantor of the Trust remains responsible for the income tax burdens and consequences of the Trust. The Grantor Trust rules are set forth at Section 671 through 678 of the Internal Revenue Code (“Code”). These rules were originally designed to place the income tax burden on the Grantor of a trust when the Grantor is not the income beneficiary of the trust, but recently have been used as estate planning vehicles. Why are Defective Trusts an effective estate planning tool? Defective Trusts are an effective estate planning tool because: (1) they allows one to “freeze” the value of assets transferred to the Defective Trust; (2) the appreciation occurs within the Trust tax free to the benefit of the children and grandchildren beneficiar
