Get The Case For An Intentionally Defective Grantor Trust - The Tax Adviser

The IDGT lets you transfer assets outside of your estate, which lets you avoid paying estate and gift taxes on the assets. The IDGT gets its defective name from its structure, which is an intentional flaw designed to provide tax benefits for the trust grantor the person who creates the trust and their beneficiaries.

When grantor trust status applies, either the grantor or a beneficiary is treated as the owner of the activity inside the trust for income tax purposes. ... The general rule is that all grantor trusts must file a Form 1041, which contains only the trust's name, address, and tax identification number (TIN) (see Regs. Sec.

What Is an Intentionally Defective Grantor Trust? ... The intentionally defective trust is created as a grantor trust with a loophole that allows the trustor to continue paying income taxes on certain trust assets, as income tax laws will not recognize that those assets have been transferred away from the individual.

According to the tax laws, IRC §671-679, a grantor trust is any trust in which the Trustor/Grantor retains control over the income or principal, or both to such an extent that he is regarded as the substantial owner of the trust property and income. ... Thus, a grantor trust does not typically file any income tax return.

When a grantor is considered an owner of the trust for income tax purposes, but has relinquished rights to the assets in the trust in a way that allows the grantor to not be considered the owner of the assets for estate tax purposes, this is called an Intentionally Defective Grantor Trust.

The one key thing that all parties should be aware is that the IRS does not require or recommend obtaining an EIN/Tax ID Number for Grantor Trusts. The client can use their own social security number when they open the account, because income from the account is to be reported on the individual income tax return of ...

The most common powers that are retained by the grantor and thus make the trust defective for income tax purposes include: Designating the grantor's spouse as a trustee and granting such trustee authority to add beneficiaries (Sec. 674(a));