Why is the Intentionally Defective Grantor Trust defective?
From an income tax and estate tax perspective, the IDGT is purposely structured to be “defective” for income tax purposes and “effective” for estate tax purposes. Meaning that if the IDGT generates income, the Trustmaker will be responsible for paying the taxes on the income; which is generally preferable to the Trustmaker, as it gives the Trustmaker the opportunity to pay the taxes on behalf of the, essentially passing more wealth down to the beneficiaries. However, when the Trustmaker passes away, the assets of the trust will not be included in the estate of the Trustmaker and will pass estate tax free to the beneficiaries. Making Outright Gifts to the Intentionally Defective Grantor Trust and Selling Assets to the Intentionally Defective Grantor Trust Intentionally Defective Grantor Trusts are typically used in conjunction with the Trustmaker selling assets to the trust. This technique works to freeze, or set the value, of the property sold to the trust in exchange for a promissory
