IDGT: “Defective” by Design, Perfect for Wealth Transfer
Tax Tips / Estate Freeze
IDGT: “Defective” by Design, Perfect for Wealth Transfer
💡 Executive Summary
- Problem: Standard irrevocable trusts pay incredibly high income taxes (37% kicks in at just ~$15k of income).
- Solution: Create an Intentionally Defective Grantor Trust (IDGT). It is “defective” because YOU (the Grantor) pay the income tax on the trust’s earnings, not the trust.
- Result: This allows the trust’s assets to grow 100% tax-free (compounding faster), and your tax payment is considered a “tax-free gift” to your heirs.
⚠️ THE “BURN” EFFECT
This strategy works only if you have enough outside liquidity to pay the trust’s tax bill every year. We call this “The Burn.” If you run out of cash and have to turn off the Grantor status, the supercharged compounding stops.
This strategy works only if you have enough outside liquidity to pay the trust’s tax bill every year. We call this “The Burn.” If you run out of cash and have to turn off the Grantor status, the supercharged compounding stops.
The IDGT is the cornerstone of dynasty wealth. It creates a “split reality”: For Income Tax purposes, the trust doesn’t exist (you own the assets). For Estate Tax purposes, the trust is a separate fortress (assets are out of your estate). This mismatch is where the alpha lies.
🧐 Core Mechanic: Installment Sale
You don’t just “give” assets to an IDGT (limited by exemption). You “sell” assets (like FLP shares) to the IDGT in exchange for a Promissory Note. The trust pays you low interest (AFR), and keeps all the upside appreciation.
You don’t just “give” assets to an IDGT (limited by exemption). You “sell” assets (like FLP shares) to the IDGT in exchange for a Promissory Note. The trust pays you low interest (AFR), and keeps all the upside appreciation.
Performance Simulation
Trust Value After 20 Years ($10M Seed)
Standard Trust (Trust pays tax)
$26M Final Value
IDGT (You pay tax)
$48M Final Value*
The Burn Bonus
GRAT vs. IDGT
| Feature | GRAT (Article 616) | IDGT Sale (This Article) |
|---|---|---|
| Risk | Low (Returns if fails) | Med (Leverage Risk) |
| Hurdle Rate | 7520 Rate (Higher) | AFR (Lower) = More Upside |
| GST Planning | Bad (Mortality Risk) | Excellent (Dynasty Ready) |
“Paying your children’s income taxes is the only way to give them money that the IRS cannot tax, cannot count as a gift, and cannot complain about.”
🔗 Related BMT Playbooks (Internal)
🛡️ The Asset: Selling Discounted FLP shares to the IDGT ⚖️ The Rival: GRAT (Use this for volatile/short-term assets) ✅ The Rate: Current Applicable Federal Rates (AFR)🏛️ Institutional Resources (External)
📜 Legal Text: IRC § 671-678 (Grantor Trust Rules) 🏛️ IRS Guide: Understanding Grantor Trusts 📉 Data: Official IRS AFR Rates (Monthly)
BMT designs for tax reality, not theory.