The IDGT: The Effective Defective Trust

Stone, Mark
September 2002
Journal of Financial Planning;Sep2002, Vol. 15 Issue 9, p120
Academic Journal
This article discusses how an intentionally defective grantor trust (IDGT) is created and how to structure a sale to the trust for estate and gift-tax planning. According to information gathered from estate tax returns filed for 1999, the U.S. Internal Revenue Service reported that very few working farmers were even subject to the estate tax, which affects only the richest two percent of U.S. residents. With regard to family-owned businesses, 70 percent fail to survive to the next generation. This high failure rate is most likely attributable to a failure to implement a management succession plan and not because of the estate tax. This lack of clarity in the estate tax laws amounts to an estate and financial planner's nightmare; however, one planning technique that may be effective in this uncertain environment is a sale to an IDGT. The sale to an IDGT is an estate freeze technique intended to reduce or eliminate the decedent's estate tax. The sale constitutes a freeze because the fair market value of the assets sold is frozen at the value on the date of sale, removing all future appreciation on such assets from the seller's estate. In structuring a sale to an IDGT, the plan must be tailored to the needs of the client. In essence, the trust is drafted as a regular entity trust with a provision that creates grantor trust status.


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