Reducing potential estate tax liability involves “squeezing” and “freezing” assets — in other words, discounting assets in various ways and locking in lower asset values.

A sale to an intentionally defective grantor trust (IDGT) is one way to obtain tax benefits while retaining control of your assets. An IDGT, if properly designed, is treated as a grantor trust for income tax purposes even though it’s an irrevocable trust for gift and estate tax purposes (this is the so-called “defect”).

What is a grantor trust?

Grantor trust status means that, as grantor, you pay income taxes on the trust’s earnings. Why is that good? It allows the trust assets to grow tax-free. Essentially, each income tax payment you make is an additional tax-free gift to the IDGT’s beneficiaries.

The trust’s irrevocability is also a benefit: The assets you transfer to it are considered to be completed gifts, so any future appreciation in their value escapes estate tax. You can avoid gift tax when funding the IDGT by structuring the transaction as an installment sale rather than a gift. You just need to make sure the IDGT assets will generate enough income to cover the installment payments. The assets will then pass to your beneficiaries tax-free after the note is paid.

There are other ways to “squeeze and freeze” assets – learn more about them in our blog “Tax Cuts and Jobs Act Estate Planning Strategies” As always, our Private Client Tax Services Team can help you navigate the rules.

For more tax reform updates, be sure to visit our Tax Reform Center- your “one stop shop” for all things Tax Cuts and Jobs Act (TCJA) related.