The Wealth Freezer: Intentionally Defective Grantor Trusts (IDGT)
The Wealth Freezer: Intentionally Defective Grantor Trusts (IDGT)
How to move $100M out of your estate without triggering Gift Tax. The art of “Selling” assets to your trust and paying the taxes for your heirs.
Executive Summary
- The “Sale” Strategy: You have a $50M pre-IPO startup stock. If you gift it, you pay massive Gift Tax (40%). Instead, you “Sell” the stock to your IDGT in exchange for a Promissory Note. Since it’s a sale, Gift Tax is $0.
- The “Freeze”: The Note pays a low IRS interest rate (AFR). If the stock grows at 20% but the Note only asks for 4%, the excess 16% growth remains in the trust Estate Tax-Free. You have effectively “frozen” the value of your estate at today’s price.
- “Intentionally Defective”: The trust is designed to be “defective” for income tax purposes. This means YOU (the Grantor) pay the income tax on the trust’s earnings. This allows the trust’s assets to compound 100% tax-free, which is mathematically equivalent to making additional tax-free gifts every year.
The Seed Gift Rule
To make the “Sale” legitimate, the Trust must have some “skin in the game” before buying your assets. Typically, you must make a “Seed Gift” of 10% of the transaction value. To sell $10M of assets, you first gift $1M to the trust. Without this, the IRS may treat the whole deal as a sham.
Mechanic: “Burn the Grantor”
Freeze
Estate Value Locked
Promissory Note
No Gift Tax
Tax Burn
You Pay, Trust Keeps
AFR Hurdle
Low Interest Rate
Simulation: Keeping Assets vs. IDGT Sale ($10M Asset growing at 10%)
Wealth Transfer Efficiency (20 Years)
| Feature | Standard Irrevocable Trust | Intentionally Defective (IDGT) |
|---|---|---|
| Income Tax Payer | The Trust (High Tax Rates) | The Grantor (You) |
| Asset Transfer | Gift (Uses Exemption) | Sale (Uses No Exemption) |
| Capital Gains | Recognized on Sale | Ignored (Sale to Self is tax-free) |
The IDGT is the most powerful engine in estate planning. It allows you to reduce your taxable estate by spending your money on your children’s taxes—a ‘gift’ the IRS does not count as a gift.”
Essential Resources
INTERNAL
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