The term intentionally defective grantor trust refers to an estate planning tool that allows for the transfer of assets for estate purposes, but retention of income for tax purposes. Intentionally defective grantor trusts allow donors to take advantage of an inconsistency between estate and income tax laws.
Intentionally defective grantor trusts (IDGT) are established by donors and structured such that they are subject to grantor trust requirements. These trusts are typically irrevocable, but allow the grantor to retain certain powers over the trust such that it is classified as a grantor trust.
There are two features of these trusts that result in their classification as an intentionally defective grantor trust:
IDGTs are used by wealthy individuals, allowing them to provide their children or grandchildren with a trust that is able to grow without reductions for income taxes, which are paid for directly by the grantor. This mechanism allows the grantor to provide beneficiaries with additional assets that are not subject to estate taxes.