February 20, 2014
What is a Defective Grantor Trust?
Lifetime gifts of assets, including closely held stock, real estate, or marketable securities, from parents to children transfers those assets to the next generation while minimizing estate taxes. For large gifts, an outright transfer, although simple and straightforward, may not be the most effective type of transfer. Not including tax considerations, straightforward gifts may not be in the child’s best interest depending on age, financial astuteness, and asset protection considerations. A method which may be in the best interest of the child is a gift, or a gift and sale, of assets to an Intentionally Defective Grantor Trust (IDGT).
In an IDGT, the grantor (the person who creates the trust) makes an irrevocable gift of property into a trust, usually set up for the grantor’s children, and names someone else as trustee. It is defective for income tax purposes, but effective for estate tax purposes. In other words, the income is taxable to the grantor, but the value of the trust is not included in his or her gross estate.
Advantages of an Intentionally Defective Grantor Trust (IDGT)
Powers Commonly Used to Create an Intentionally Defective Grantor Trust
Only certain select powers will achieve the two-prong test of taxing the trust income to the grantor but excluding the trust assets from the grantor’s gross estate. To ensure grantor trust treatment more than one of the following powers will often be included in the trust document.
This is only a brief overview of some important considerations associated with intentionally defective grantor trusts (IDGTs) and is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.
If you have retirement on your mind, the big question is this: Are you in a financial position to do so? While nothing replaces the advice of a seasoned advisor, you can take your first step to answering this question by applying a simple 5-step calculation.
If you’re not a fan of Black Friday chaos—you know…the crowds, the rush, the relentless search for a parking space—then ditch the onsite shopping this year while still enjoying the sweet deals.
The Department of Labor (DOL) announced a final rule that allows a much larger pool of employees to earn overtime if they work more than 40 hours per week. Specifically, the DOL raised the salary level for employees who are counted as “exempt” (or unable to earn overtime pay).