An Intentionally Defective Grantor Trust (IDGT) is a useful tool for families and individuals who have appreciating assets, such as a family business or real estate. It allows the grantor to transfer appreciating assets, while minimizing tax exposure. By establishing an IDGT, the grantor pays income taxes on trust assets, allowing them to grow tax-free for the benefit of future generations. The unique structure significantly reduces the size of the grantor’s estate while shifting valuable assets out of it, avoiding substantial estate taxes down the line.

An intentionally defective grantor trust is drafted using language that contains “intentional defects.” These are provisions that make the trust meet the definition of a revocable trust for income tax purposes, while also being considered an irrevocable trust for estate tax purposes. For a revocable trust, income is usually taxed to the grantor of the trust who is treated as the owner for tax purposes. An irrevocable trust is a separate entity from the grantor and has its own separate income tax return. This has the benefit of removing the assets from the grantor’s estate. Irrevocable trusts may present some problems however, because the funds are not accessible and it is not easily revoked.

However, an IDGT benefits from the advantages of both types of trusts because it is a grantor trust for income tax purposes, while shielding assets from the grantor’s estate like an irrevocable trust. One of the key advantages of an IDGT is its flexibility. The “swap power” feature allows the grantor to swap low-growth assets for appreciating assets held by the trust, ensuring that the most valuable assets remain out of the taxable estate.

If you have significant assets or a family business and you are embarking on estate planning, please contact our experienced Massachusetts estate planning team, Attorney Rob Arone and Attorney Julia Abbott to learn how we can help you plan your estate effectively to create security and peace of mind for you and your family.