An intentionally defective grantor trust in Indiana is a financial tool that can separate out income and estate taxes for some assets. This helps avoid some of the tax burden falling on the people who will inherit the assets in the trust. It’s a way to allow the grantor of the trust to pay some of its taxes instead of their children or grandchildren.
How IDGTs work
IDGTs are a technique in which the grantor, a person who is doing estate planning, sells their own assets to a trust that they own. When that happens, they pay income tax on those assets, and then those assets are no longer subject to estate taxes because it is not part of the estate anymore. The grantor is liable for income tax on income that the asset generates, but this lowers the overall tax burden that the person or people who benefit from the trust need to pay.
Transferring assets to the trust
The grantor sells the asset in the form of a very low interest loan, and the interest rate is so low that they do not need to pay any taxes on it. The IDGT is one of several trust approaches that can help reduce taxes for grantors who want to ensure that they can pass on their considerable assets to their descendants and reduce their tax burden.
The benefit of the IDGT is its ability to separate out estate and income tax on assets and preserve the growth and appreciation of those assets in a trust. It is a low-cost tax reduction strategy that can play a key role in estate planning.