Using an Intentionally Defective Grantor Trust (IDGT) in Your Estate Plan
When it comes to estate planning, few tools offer as much control and tax efficiency as the intentionally defective grantor trust—or IDGT. Despite the name, it’s anything but flawed.
An IDGT is a powerful way to transfer appreciating assets out of your estate while continuing to pay the income tax on those assets. That tax treatment creates a unique compounding advantage for families looking to preserve wealth across generations.
What Makes It “Defective”?
The word “defective” refers only to how the trust is treated for income tax purposes—not a problem with the trust itself.
With an IDGT, the grantor (you) is treated as the trust’s owner for income tax purposes, but not for estate tax purposes. This distinction allows the trust assets to grow outside your taxable estate, while you continue to pay income taxes on the trust’s earnings each year.
That income tax payment is effectively a gift—made without using any of your lifetime exemption or annual exclusions. And it allows the trust to grow undiminished by income taxes, year after year.
Why High-Net-Worth Families Use It
For families with estates likely to exceed the federal exemption ($15M per person in 2025, the IDGT provides two major advantages:
- Freezing Estate Value
You can sell or gift appreciating assets—such as private business interests, investment portfolios, or real estate partnerships—to the IDGT. The value of those assets is determined at transfer date, and all future growth occurs outside your estate. - Leveraging Intra-Family Loans
Sales to an IDGT are often structured with a promissory note at the Applicable Federal Rate (AFR), which remains near historic lows. If the trust’s investments outperform the note interest, that excess appreciation escapes estate taxation entirely.
Why It Works So Well
Because you’re still considered the owner for income tax purposes, the initial sale to the IDGT doesn’t trigger capital gains—and the trust’s growth isn’t eroded by taxes.
In short, you’ve created an estate-free compounding engine funded with tax dollars you would have paid anyway.
Strategic Use Cases
- Move appreciating private business or partnership interests out of the estate
- Pair with a family limited partnership (FLP) or GRAT for layered planning
- Combine with life insurance to provide estate liquidity if the math works
- Use dynasty trust language to protect wealth for multiple generations
The Bottom Line
An IDGT is not a one-size-fits-all solution. It requires careful coordination between estate counsel, a CPA, and a financial advisor to get the details right—from trust structure to asset valuation.
But for families with taxable estates, it remains one of the most powerful tools available to reduce estate taxes, retain control, and pass more wealth—net of tax—to the next generation.
If you're evaluating more advanced estate planning strategies, Brickley Wealth Management can help you think through how a trust like this may fit within your broader legacy goals.