The Intentionally Defective Grantor Trust (IDGT) is an irrevocable trust used in wealth transfer and estate planning.
Did you know gifting estate assets to family members is a common strategy for avoiding estate taxes levied after you pass away? It's not as simple as handing over property and investments and calling it a day. Knowing the rules of estate planning and utilizing specific wealth-building strategies like an Intentionally Defective Grantor Trust can not only help you mitigate estate-draining taxes but also ensure asset growth and the security of your heirs.
Currently, the IRS allows you to give away up to $19,000 a year without penalty. Anything over the annual “gift tax exclusion” will reduce your taxable estate exemption. At an exemption of $15 million in 2026, most people will not have to worry about federal estate taxes.
Additionally, the federal estate tax, or “death tax” depending on your perspective, can reach 40 percent. Twelve states (Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and the District of Columbia) also levy an estate tax, and another five states (Kentucky, Maryland, Nebraska, New Jersey) have an inheritance tax. While large estate-holders should definitely consider lowering the value of their estates, so should those with moderately sized estates and assets likely to appreciate in the coming years.
One innovative wealth transfer vehicle is the Intentionally Defective Grantor Trust, or an IDGT. Here is how it works. When you put income-producing assets in an IDGT, you, the grantor, pay the income taxes. Normally, a trust would pay income tax on the trust’s assets, reducing the value of the assets held in the trust and the proceeds beneficiaries would receive. When the grantor pays the trust’s income taxes, however, the assets are able to grow income tax-free, and the grantor’s estate is reduced by the amount of the income tax payments he or she makes. An added benefit is that the IRS does not consider this form of wealth transfer a taxable gift, so your beneficiaries can keep more of their inheritance, especially as the IDGT assets appreciate. Finally, individuals generally pay income tax at lower rates than trusts, so there is an income tax-savings benefit.
We know this topic may raise many more questions than it answers and cause you to think carefully about your own Florida estate planning strategies. Tax mitigation strategies and IDGTs can be complicated and depend on an estate’s individual circumstances.
