Gift-Giving Strategies: Intentionally Defective Grantor Trust (IDGT)

If you have consulted a Massachusetts tax planning lawyer for assistance with your gift-giving planning, he or she may have suggested utilizing an Intentionally Defective Grantor Trust, or IDGT, to protect your assets from extra taxation. This strangely named but useful form of asset control can offer you new and interesting options for strategic gift-giving.

Why “defective”?

Massachusetts tax planning lawyerThe Intentionally Defective Grantor Trust gets its name from the complex relationship between Internal Revenue Code regulations for income taxation and gift-giving taxation. Although the two systems follow different rules, the IDGT uses a “defective” connection between the two systems to protect the trust. In fact, the tax liability lies with the grantor, not the trust, which means that the trust receives a free gift.

How it works

  1. 1.      Your Massachusetts tax planning lawyer assists you with the legal set-up for establishing an IDGT trust. Their advice is very valuable at this point, as you want to avoid any serious legal missteps that could lead to big problems down the road.
  2. 2.      You, the grantor, fund the trust with a gift that establishes the fund’s commercial legitimacy. Referred to as “safe harbor,” this equity transfer means that the IRS cannot argue that everything is actually a gift.
  3. 3.      Now it’s time to sell a low-valued asset, hopefully with appreciation potential, to the trust. In exchange, the note is set at a low interest rate.
  4. 4.      A sale between the grantor and the trust can’t be construed as taxable income, and the market purchase doesn’t qualify as a gift. Thus interest payments are made.
  5. When the term is complete the note is repaid. Sometimes the note is refinanced, but this is unlikely due to the current low interest environment.

Contact an experienced Massachusetts tax planning lawyer if you feel that an IDGT may prove beneficial in your personal tax planning. Call Ionson Law at (781) 674-2562 for more information about your finances and taxation.

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