The Super-Freeze: Intentionally Defective Grantor Trust (IDGT)
The Super-Freeze: Intentionally Defective Grantor Trust (IDGT)
Burning your estate to build theirs: How to sell assets to your heirs “tax-free” while legally paying their income tax bill.
Executive Summary
- The “Defective” Logic: An IDGT is designed to be “defective” for Income Tax purposes (Grantor pays the tax) but “effective” for Estate Tax purposes (Assets are out of the estate). This split personality is the key loophole.
- The “Burn” Benefit: Because the Grantor (You) is responsible for the trust’s income tax, every dollar of tax you pay is essentially a tax-free gift to your heirs. It allows the trust assets to grow unencumbered by taxes (Tax-Free Compounding).
- Sale, Not Gift: Instead of using your lifetime gift exemption, you sell appreciating assets (like pre-IPO stock) to the IDGT in exchange for a low-interest Promissory Note. This “freezes” the value at the sale price.
The “Seed Money” Rule
You cannot sell assets to an empty trust (that’s a sham). You must first “seed” the IDGT with a gift equal to at least 10% of the purchase price. This ensures the trust has “skin in the game” to validate the installment sale.
Mechanic: The Defective Grid
Estate Free
Grantor Pays
Income Tax Liab
Note Sale
Transfer Method
Tax Burn
Wealth Transfer
Simulation: IDGT vs. Standard Trust ($20M Asset)
Wealth Transfer Efficiency over 15 Years
| Feature | Standard Irrevocable Trust | IDGT (Defective Trust) |
|---|---|---|
| Income Tax Payer | The Trust (High Rates) | The Grantor (You) |
| Estate Tax Payer | Exempt (Outside Estate) | Exempt (Outside Estate) |
| Net Effect | Asset Removed | Asset Removed + Tax Liability Removed |
“In the world of IDGTs, paying taxes is not a burden; it is a strategic weapon. By paying the tax for your children, you are effectively doubling their inheritance.”
Essential Resources
INTERNAL
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