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An intentionally defective grantor trust is an estate-freeze tool for families with appreciating assets. You pay the income tax on the trust’s earnings, but those assets aren’t part of your estate.
Confidential, handled by a CPA, not a call center.
The short version
The defect
An IDGT is a trust that is “defective” on purpose: you pay the income tax on its earnings, but those assets aren’t part of your estate for estate tax.
The payoff
Because you pay the trust’s income tax and that payment is not a gift, the assets grow undiminished for your heirs while your taxable estate shrinks.
The team
It is an advanced strategy that needs an attorney to draft and a CPA to model and report. Maris & Associates CPAs handle the tax side.
We model whether the freeze is worth it for your assets and coordinate with your attorney.
Talk to a CPA about an IDGTUnder the grantor trust rules (Internal Revenue Code sections 671 through 679), you are treated as the owner of the trust’s income for income tax, so you report its earnings on your own return. For estate tax, the assets are outside your estate. That split is the intentional “defect.”
You pay the trust’s income tax out of your own pocket, and under Rev. Rul. 2004-64 that payment is not a gift to the beneficiaries. So the trust assets compound without being drained by tax, and your estate shrinks by the tax you pay.
Shrinks by the income tax you pay each year — tax the IRS does not treat as a gift.
Compound undiminished inside the trust, outside your estate, growing for the next generation.
Step by step
Your attorney drafts the trust. This is legal work.
You make a seed gift to fund it and file a gift tax return (Form 709).
You sell appreciating assets to the trust for a promissory note, with no capital gain recognized (Rev. Rul. 85-13). This freezes their value in your estate at today’s number.
You pay the trust’s income tax each year, and future growth passes to your heirs outside your estate.
IDGTs fit high-net-worth families with appreciating assets, especially those wanting to use the $15 million per-person exemption while it applies. They are not for modest estates, where simpler planning does the job.
“The ‘defect’ in an IDGT is actually its greatest strength. By paying the trust’s income taxes out of your own pocket, which the IRS does not consider a gift, you allow the assets to compound for your heirs while simultaneously shrinking your own taxable estate.”
“This outfit has been super helpful with my taxes over the last couple years. Special shout out to their strategies on saving tax. Thank you!”
Your attorney drafts the trust; that is legal work. We handle the tax side: modeling whether an IDGT is worth it for you, preparing the gift tax return (Form 709) for the seed gift, reporting the trust’s income on your return, and planning basis. We quote it up front. For the bigger picture, see our estate planning CPA page.
The income tax you pay on the trust’s earnings transfers wealth to your heirs without using gift tax exemption. That result depends on careful drafting and careful tax work.
Tell us about the assets you would want to move and your estate goals, and we will model whether an IDGT makes sense and coordinate with your attorney.
Reviewed by Sara Stegall, JD. Tax Attorney at Maris & Associates CPAs, Everett, WA. Advises individuals and families on trust and estate taxation, entity structuring, and complex tax law research.
