What is an intentionally defective irrevocable trust?

An Intentionally Defective Irrevocable Trust (IDIT), or an Intentionally Defective Grantor Trust (IDGT) is a useful estate tax planning instrument if arranged properly. It is set up to deliberately fail certain technical tests in the tax law, but still be approved by the IRS.

Does an intentionally defective grantor trust get a step up in basis?

The defective grantor trust gets the grantor’s basis in the assets. Had the property remained in the grantor’s estate, its basis would be adjusted up or down to the property’s fair market value at the grantor’s death.

Can the grantor be the trustee of an intentionally defective grantor trust?

On the one hand, the grantor must give up dominion and control over the IDGT to avoid inclusion of the trust’s property in the grantor’s gross estate. IRC §§ 2036–2042. In this regard, some IDGTs expressly prohibit the grantor, or anyone related or subordinate to the grantor, from ever becoming a trustee.

What makes an idgt An Intentionally defective grantor trust?

An intentionally defective grantor trust (IDGT) is a complete transfer to a trust for transfer tax purposes but an incomplete, or “defective,” transfer for income tax purposes.

Can a grantor be a beneficiary of a defective Trust?

In general, a defective grantor trust is a trust in which the grantor is denied the actual use and enjoyment of assets contributed to the trust. Therefore, contributions to such a trust must be irrevocable transfers, and the grantor cannot be a trust beneficiary.

When to use An Intentionally defective irrevocable trust?

Intentionally defective irrevocable trusts (IDITs) typically are used when individuals want to transfer income-producing and highly appreciating assets (such as S-corporation stock or real estate) out of their estate, often while taking into account valuation discounts (as applicable).

When is a grantor trust irrevocable for estate purposes?

Because the trust is irrevocable for estate and gift purposes and the grantor has not retained any powers that would cause estate tax inclusion, the future value of the assets transferred is removed from the grantor’s gross estate on the date of the trust’s funding.