The IDGT Strategy: “Defective” by Design, Perfect for Wealth Transfer
Tax Tips / Advanced Planning
The IDGT Strategy: “Defective” by Design, Perfect for Wealth Transfer
💡 Executive Summary
- Problem: Standard trusts pay high income taxes (37% kicks in at just ~$14k), eroding growth.
- Solution: An IDGT is “defective” for income tax (you pay it) but “effective” for estate tax (it’s out).
- Result: Assets grow tax-free for heirs, while your tax payments act as a “Tax-Free Gift.”
⚠️ THE “BURN” ADVANTAGE
Paying the trust’s income tax is not a penalty; it is the feature. It reduces your taxable estate (“Burn”) while allowing the trust to compound without tax drag (“Supercharge”).
Paying the trust’s income tax is not a penalty; it is the feature. It reduces your taxable estate (“Burn”) while allowing the trust to compound without tax drag (“Supercharge”).
In the world of UHNW (Tier L3+) planning, the goal is to disconnect income tax liability from asset ownership. The IDGT creates a legal fiction: you own the income (tax), but the trust owns the asset (equity).
🧐 Core Mechanic: Sale vs. Gift
Unlike a GRAT, you typically sell assets to an IDGT in exchange for a Promissory Note. Because the trust is “you” for income tax, there is Zero Capital Gains Tax on this sale (Rev. Rul. 85-13).
Unlike a GRAT, you typically sell assets to an IDGT in exchange for a Promissory Note. Because the trust is “you” for income tax, there is Zero Capital Gains Tax on this sale (Rev. Rul. 85-13).
Performance Simulation
Trust Growth Scenario (15 Years)
Standard Trust (Pays Own Tax)
Growth Dragged by Tax
$15M Net
IDGT (Grantor Pays Tax)
“Supercharged” Growth
$25M Net
The “Sale to IDGT” Blueprint
| Step | Action | Strategic Intent |
|---|---|---|
| 1. Seed Gift | Gift 10% Cash | Establishes “Creditworthiness” |
| 2. Sale | Sell Asset for Note | Freezes value at current price |
| 3. Tax Burn | Grantor pays Income Tax | Phantom Gift (Tax-Free) |
“The most powerful gift you can give your children is to pay their taxes for them. The IDGT makes this legally mandatory.”
🔗 Related BMT Playbooks (Internal)
🛡️ Sibling Strategy: GRAT for Appreciation Transfer 📉 Foundation: Step-up in Basis Rules ✅ Data: Applicable Federal Rates (AFR) for Notes🏛️ Institutional Resources (External)
📜 Legal Text: IRC § 671-678 (Grantor Trust Rules) ⚖️ Key Ruling: Rev. Rul. 85-13 (No Gain on Sale) 🏛️ IRS Official: Current AFR Rates
BMT designs for tax reality, not theory.