Intentionally Defective Grantor Trust: Fill & Download for Free

There’s a good summary at Intentionally defective grantor trust - Wikipedia. To oversimplify, an IDGT is an effective gift for estate tax purposes but not for income tax purposes. It serves to freeze the value of an asset for estate tax purposes.It’s a fairly sophisticated estate tax technique, although not as common due to the increased exclusion amount.

When I was working in the private wealth space, we had one very wealthy family as a client who's family came over on The Mayflower!That was many many generations ago, so it certainly is possible to create a structure that ensures you have a lasting legacy. There are many trusts available toEven now that we help mostly retail clients at Hedgeable who typically have balances less than $1 Million, I still see the same concerns. How do I ensure my great grand-kids are left with a better financial future and a better world?There are a lot of trusts available to you that control how much trustees can be distributed and how long the trust lasts, plus many other rules and restrictions (charitable donations, structure,. You should consult with a trust attorney and accountant, but here is a list of trusts that many High Net Worth Individuals use -Revocable Living TrustGrantor TrustIrrevocable Living TrustTestamentary TrustMinor’s TrustBeneficiary’s TrustBlind TrustDiscretionary TrustIntentionally Defective Grantor TrustCredit Shelter TrustMarital TrustQTIP TrustQualified Personal Residence TrustGeneration Skipping TrustGrantor Retained Annuity Trust (GRAT)Charitable Remainder Annuity Trust (CRAT)Charitable Lead Annuity Trust (CLAT)Charitable Remainder Unitrust (CRUT)Charitable Lead Unitrust (CLUT)Sharkfin Charitable Lead Annuity TrustIrrevocable Life Insurance Trust (ILIT)Buildup Equity Retirement TrustGrantor Retained Unitrust (GRUT)Grantor Retained Income Trust (GRIT)Domestic Asset Protection TrustOffshore Asset Protection TrustTotten TrustLand Trust or Illinois Land TrustIRA TrustDisclaimer: This is not a solicitation to buy or sell securities or an offer of personal financial advice. Past performance is not indicative of future performance. It is suggested you seek out the help of a financial professional before making any investing or personal financial management decision.

Edit: I should note that tax evasion (not paying tax owed) is illegal while tax avoidance (trying to reduce your tax liability) is not.Erik Fair and David John Marotta give great answers that focus primarily on income tax minimization. Another important area is the minimization of gift and estate taxes. There are several techniques that serve to allow for tax-efficient transfer of wealth from one generation to another. These include, among others:Giving away assets as early on as possible. Gift tax is calculated based on the fair market value of the asset at the time of the gift. Any post-gift appreciation is not subject to gift tax. The earlier on the transfer occurs, the more appreciation accrues to the recipients. This is especially great if there is a large liquidity event of some sort after the transfer occurs (such as a buyout of a business that was transferred.Making use of GST-Exempt Trust. The generation-skipping transfer tax ("GST") is too big a topic for this answer, but it is basically a tax that occurs (at the same rate as the estate tax) anytime property passes two or more generations below the transferor (i.e. a gift from grandparent to grandchild or a trust that becomes for the benefit of grandchildren on a child's death). It is imposed on top of an in addition to the estate tax and happens each time it passes from one generation to another when in most trusts. Each individual has a lifetime exemption from GST (currently $5.25 Million for 2013). If you transfer assets to a properly structured trust and allocate your GST exemption to it, those assets can pass from one successive generation to another without being subjected to GST. When you combine this with Item 1 above and transfer assets into a GST-exempt trust early on, you can have all that post-transfer appreciation remain exempt from generation to generation.Leveraging your GST exemption. Insurance trusts are the classic example of leveraging your GST exemption. Let's say you transfer $100,000 to a properly structured trust and allocate GST exemption to it. That $100,000 is used to pay premiums on a $5 Million life insurance policy. Upon the death of the insured, the entire payoff amount (all $5 Million) would be GST exempt because all the premiums were exempt. Another example is putting $100,000 in GST-exempt assets into a properly structured trust and investing that into a business or securities that perform well. All of the proceeds remain GST-exempt.Sales to grantor trusts. Parents create an "Intentionally Defective Grantor Trust" for the benefit of children. The parents make a gift to the trust using part of their lifetime credit against gift/estate tax and allocate GST exemption to it. The trust then uses the money as a down payment to purchase assets from the parents' estates (usually fractional interests in businesses which receive a discount for lack of control and lack of marketability, making the asset have a lower value). The down payment is made to the parents and the balance of the purchase price is in the form of a properly structured promissory note paying minimal interest (cannot be too low or triggers additional gift tax). The trust uses income from the business to pay off the note over time. Because the trust is a "grantor trust," it is considered the same taxpayer as the parents. Therefore, 1) there is no gain triggered on the sale of the asset sold by the parents and 2) the interest income on the promissory note is not taxable to the parents. In addition, the best part is that, again because of the grantor trust status, the parents claim all of the income tax liability of the trust. The result is that the assets of the trust for the kids keep growing but all income tax is paid by the parents. This income tax paid by the parents is not considered a gift, so it is essentially like giving a tax-free gift to the kids equal to the income tax liability of the trust assets. This is often referred to as an "estate freeze" technique because the appreciation happens outside of the parents' taxable estate.Making use of specialized tax-favorable trusts, such as GRATs, CLATs and QPRTs (used for primary residences and vacation homes).This is just the tip of some of the methods we estate planners use to effectively transfer wealth with minimal gift and estate tax consequences.