Estate Freeze Techniques Using Intentionally Defective Grantor Trusts (IDGTs)
High-net-worth families are always seeking ways to minimize estate taxes while preserving long-term wealth.
One of the most sophisticated and effective strategies? The use of Intentionally Defective Grantor Trusts (IDGTs).
These trusts allow you to “freeze” your estate while shifting future appreciation out of your taxable estate and into the hands of your heirs—tax efficiently.
📌 Table of Contents
- What Is an Intentionally Defective Grantor Trust?
- Why Use an Estate Freeze Strategy?
- How an IDGT Works
- Tax Benefits and Wealth Transfer Impact
- Common Pitfalls and Considerations
What Is an Intentionally Defective Grantor Trust?
An IDGT is an irrevocable trust that is “intentionally defective” for income tax purposes—but effective for estate tax purposes.
The grantor continues to pay income taxes on the trust’s earnings, which allows trust assets to grow tax-free and reduces the grantor’s taxable estate over time.
Meanwhile, the assets inside the trust are excluded from the estate for federal estate tax calculation purposes.
Why Use an Estate Freeze Strategy?
Estate freeze techniques aim to lock in the current value of assets within the estate, shifting all future appreciation to beneficiaries.
This helps avoid exposure to future estate tax increases or valuation surges—especially for rapidly appreciating businesses or investment portfolios.
IDGTs are particularly useful for transferring closely held business interests, real estate, or high-growth stock positions.
How an IDGT Works
✅ The grantor sells or gifts assets to the IDGT in exchange for a promissory note (if structured as a sale).
✅ The trust pays interest annually and the principal over a defined term.
✅ The grantor pays income taxes on trust earnings (not the trust), which allows trust assets to compound faster.
✅ At the end of the note, the trust keeps the appreciation—outside the estate.
Tax Benefits and Wealth Transfer Impact
💰 No Income Tax to the Trust: The grantor’s payment of taxes is not treated as a gift, but boosts the value transferred to heirs.
💰 Gift Tax Optimization: If assets are sold rather than gifted, the transaction may not consume gift tax exemption.
💰 Appreciation Avoids Estate Tax: All post-sale growth escapes estate tax inclusion if the grantor survives the note term.
Common Pitfalls and Considerations
⚠️ Death During Note Term: If the grantor dies before repayment, part or all of the note may be included in the estate.
⚠️ Improper Valuation: Assets sold to the IDGT must be professionally appraised to avoid IRS scrutiny.
⚠️ Grantor Status Must Be Maintained: Defectiveness must remain intact or tax treatment may change unexpectedly.
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Keywords: IDGT estate planning, intentionally defective grantor trust, estate freeze strategy, wealth transfer tax savings, high-net-worth trust planning
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