Intentionally Defective Grantor Trust (IDGT)

An Intentionally Defective Grantor Trust (IDGT) exploits a deliberate mismatch in the tax code: it is "defective" for income-tax purposes, meaning the grantor is treated as the owner of trust income and must pay the tax on it, while simultaneously being outside the grantor's estate for estate- and gift-tax purposes. The word "intentionally" signals that this mismatch is engineered, not accidental.

The benefit of the grantor paying income tax on trust assets is subtle but powerful: each tax payment is effectively a tax-free gift to the trust beneficiaries, because money that would otherwise leave the trust to pay taxes stays invested and compounding. Over a long time horizon, this can meaningfully increase the amount that reaches heirs. Families at higher wealth levels exploring irrevocable trust strategies sometimes evaluate IDGTs for this reason.

A common transaction inside an IDGT is an installment sale: the grantor sells an asset, perhaps a concentrated stock position or a business interest, to the trust in exchange for a promissory note. Because grantor and trust are treated as the same entity for income-tax purposes, no capital-gains tax is triggered on the sale. A common confusion is conflating IDGT with a GRAT; while both involve grantor trust status, their mechanics and risk profiles differ significantly. A qualified attorney and CPA must evaluate any particular situation.