How can the use of an Intentionally Defective Grantor Trust help in the Transfer of a Family Business and Wealth to my Children?

An Intentionally Defective Grantor Trust (“IDGT”) is a Trust that is treated as a Grantor Trust for income tax purposes, but is treated as a completed transfer for gift and estate tax purposes. The Grantor Trust status for income tax purposes means that the Trust will be taxed to the creator of the Trust even though the assets are owned by the IDGT. This removes the appreciation of the asset from your estate and allows for a tax free gift to your children in the amount of the income tax paid on the IDGT each year. The IDGT is growing income tax free while your wealth is decreasing in the amount of the income taxes paid each year, which results in a decrease of your taxable estate for estate and gift tax purposes and allows for increased wealth to be transferred to your children in the amount of the income taxes paid by you each year. This result can be maximized through the use of a note sale of the business interest and a valuation of the business interest transferred to the IDGT.

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