IDGT

IDGT stands for Intentionally Defective Grantor Trust. This is a trust which is structured (in terms of the language in the trust document and its operations) so that it will be treated for income tax purposes as a “grantor trust”. A grantor trust is a trust that you set up and transfer property to, but which is taxed to you for income tax purposes. The most common of such trusts is the popular revocable living trust.

When most estate planners speak of an IDGT, they are really referring to an IDIGT, which is an Intentionally Defective Irrevocable Grantor Trust. This is a trust, as above, but which cannot be changed (irrevocable). A popular use of such trusts is for the grantor, the person setting up the trust, to sell assets to the trust. Because the trust is irrevocable the intent is that the value of the assets sold is removed from the grantor’s estate for tax and asset protection purposes. However, since the trust is a grantor trust no income tax has to be recognized on this sale. These are highly complex transactions. Compare to a GRAT.