There are some types of trusts used in the estate planning field that can be quite a mouthful to say out loud, and as a result a lot of acronyms are utilized. One of these is “IDGT,” and it stands for an intentionally defective grantor trust.
What is going to stand out the most to people when they hear about these trusts is the term “defective.” It can be hard to understand why anyone would want to create anything that is intentionally defective given the literal definition of the term.
The thing that makes these trusts defective as it were is the fact that the grantor of the trust, which is irrevocable, still has to pay income taxes on earnings derived from the utilization of assets that have been conveyed into the trust.
However, these vehicles do provide estate tax efficiency. Assets that you have placed into one of these trusts are no longer going to be considered part of your estate by the IRS.
When you create the trust you’re going to name beneficiaries. It is logical to assume that you want to provide as much as you can to these beneficiaries, who would presumably be your children and/or grandchildren.
When you pay the taxes yourself as the grantor you are allowing the trust to grow without being burdened by taxation. And, you are continuing to reduce the taxable value of your estate as you divest yourself of personal assets to pay taxes on the income earned by the trust.