Advanced Wealth Transfer

Intentionally Defective Grantor Trust (IDGT)

Freeze your estate at its current value while trust assets grow tax-free for your beneficiaries. You pay the income tax on trust earnings, effectively making a tax-free additional gift every year.

0%
Income Tax on Trust Growth
40%
Estate Tax Savings
72hr
Document Delivery
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Understanding the Basics

What Is an IDGT?

An Intentionally Defective Grantor Trust (IDGT) is an irrevocable trust that is "defective" for income tax purposes but effective for estate and gift tax purposes. This means the trust is treated as a separate entity for estate taxes (removing assets from your taxable estate), but you, the grantor, continue to pay income taxes on the trust's earnings as if you still owned the assets.

This "defect" is intentional and beneficial. Because you pay the income tax, the trust assets grow without being diminished by taxes, compounding at a faster rate. Your income tax payments are not treated as additional gifts to the trust, so they do not consume any of your gift tax exemption. In effect, every dollar of income tax you pay on behalf of the trust is a tax-free transfer to your beneficiaries.

IDGTs are commonly funded through an installment sale, where the grantor sells appreciating assets to the trust in exchange for a promissory note. This technique freezes the value of the assets for estate tax purposes at the sale price, while all future appreciation belongs to the trust and passes to beneficiaries outside of the taxable estate.

Is It Right for You?

Who Is an IDGT For?

Business Owners Planning Succession

Sell business interests to an IDGT at current values, freeze your estate, and let all future growth accrue to the next generation. The installment sale structure provides you with ongoing income through the promissory note payments.

High-Income Earners With Capacity to Pay Trust Taxes

If you have sufficient income to pay taxes on behalf of the trust without affecting your lifestyle, the IDGT maximizes the tax-free compounding effect for your beneficiaries. The higher your tax bracket, the larger the effective gift.

Families With Rapidly Appreciating Assets

The installment sale to an IDGT freezes the value at today's prices. All appreciation above the Applicable Federal Rate (AFR) on the note passes estate and gift tax-free to beneficiaries, making this ideal for high-growth assets.

Estate Tax Reduction Without Losing Control

By structuring the trust with specific grantor trust powers, you maintain income tax responsibility (effectively ongoing gifts) while the trust uses an independent trustee to manage and distribute assets.

What You Get

Key Features

Estate Freeze

Lock in asset values at today's prices. All future appreciation passes to beneficiaries outside of your taxable estate.

Tax-Free Compounding

Because the grantor pays all income taxes, trust assets compound without any tax drag, accelerating growth for beneficiaries.

Installment Sale Structure

Sell assets to the trust in exchange for a promissory note at the AFR, providing you ongoing payments while removing appreciation from your estate.

No Capital Gains on Sale

Because the trust is a grantor trust for income tax purposes, the sale to the IDGT is disregarded for income taxes, generating no capital gains tax on the transfer.

The Process

How It Works

1

Seed the Trust

Make an initial gift to the IDGT (typically 10% of the assets you plan to sell) to establish the trust's equity and creditworthiness.

2

Installment Sale

Sell appreciating assets to the IDGT in exchange for a promissory note bearing interest at the Applicable Federal Rate. No capital gains tax is triggered.

3

Growth & Tax Payments

Assets grow inside the trust while you pay income taxes on trust earnings. The trust makes note payments to you from its cash flow.

4

Wealth Transfer

All appreciation above the AFR accumulates in the trust for your beneficiaries, free of estate and gift tax.

Sophisticated Wealth Transfer

Freeze Your Estate. Accelerate Their Inheritance.

An IDGT combines estate tax reduction with income tax optimization. Our AI models the exact benefit based on your assets and growth projections.

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Common Questions

Frequently Asked Questions

The term "defective" refers to the trust's status for income tax purposes. Certain powers retained by the grantor (such as the power to substitute assets of equal value) cause the IRS to treat the trust as though the grantor still owns the assets for income tax purposes. This "defect" is intentional because it creates the beneficial result of grantor-paid income taxes.
The seed gift (typically 10% of the sale price) establishes equity in the trust so the IRS treats the installment sale as a legitimate transaction rather than a gift. Without sufficient equity, the IRS could argue that the promissory note is not a bona fide sale, recharacterizing the entire transfer as a taxable gift.
When the grantor dies, the trust loses its grantor trust status and becomes a separate taxpayer. Any remaining balance on the promissory note is included in the grantor's estate, but the trust assets themselves (including all appreciation) remain outside the estate. The trust then pays its own income taxes going forward.
Yes, the grantor can "toggle off" grantor trust status by releasing the power that causes the defect. However, this triggers recognition of the installment sale for income tax purposes, which could result in capital gains tax. This decision should be made carefully with professional advice, and our attorneys can guide you through the implications.

The Power of Intentional Imperfection

An IDGT is one of the most tax-efficient wealth transfer tools available. Our team will model the exact benefit for your family and handle every detail.

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