what is an intentionally defective grantor trust 
an intentionally defective grantor idgt trust is an estate planning tool used to freeze certain assets of an individual for estate tax purposes but not for income tax purposes the intentionally defective trust is created as a grantor trust with a loophole that allows the them to receive income from certain trust assets the grantor pays income tax on any generated income but the estate does not incur any estate taxes when the grantor dies understanding intentionally defective grantor trustsgrantor trust rules outline certain conditions when an irrevocable trust can receive some of the same treatments as a revocable trust by the internal revenue service irs these situations sometimes lead to the creation of what are known as intentionally defective grantor trusts in these cases a grantor is responsible for paying taxes on the trust s income but trust assets are not counted toward the owner s estate however such assets would apply to a grantor s estate if the individual runs a revocable trust because the individual would effectively still own the property for estate tax purposes the value of the grantor s estate is reduced by the amount of the asset transfer the individual will sell assets to the trust in exchange for a promissory note also called an installment note of some length such as 10 or 15 years the note will pay enough interest to classify the trust as above market but the underlying assets are expected to appreciate at a faster rate the beneficiaries of idgts are typically children or grandchildren who will receive assets that have been able to grow without reductions for income taxes which the grantor has paid he idgt can be an effective estate planning tool if appropriately structured allowing a person to lower their taxable estate while gifting assets to beneficiaries at a locked in value the trust s grantor can also reduce their taxable estate by paying income taxes on the trust assets essentially gifting extra wealth to beneficiaries due to the complexity an idgt should be structured with the assistance of a qualified accountant certified financial planner cfp or an estate planning attorney selling assets to an intentionally defective grantor trustthe structure of an idgt allows the grantor to transfer assets to the trust either by gift or sale gifting an asset to an idgt could trigger a gift tax so the better alternative would be to sell the asset to the trust when assets are sold to an idgt there is no recognition of a capital gain which means no taxes are owed this is ideal for removing highly appreciated assets from the estate in most cases the transaction is structured as a sale to the trust to be paid for in the form of an installment note payable over several years the grantor receiving the loan payments can charge a low rate of interest which is not recognized as taxable interest income however the grantor is liable for any income the idgt earns if the asset sold to the trust is income producing such as a rental property or a business the income generated inside the trust is taxable to the grantor frequently asked questions