Are you nervous about a possible estate tax change coming in 2021? If so, deciding to put some of your assets into a trust may be a good option. One popular option may be an intentionally defective grantor trust, IDGT, because it can avoid certain tax consequences of a trust right now while removing the assets from your taxable estate. Let us review some tips about using this type of trust to prepare for an estate tax change.
Unlike a typical grantor trust, an intentionally defective trust helps ensure that the grantor continues to pay income taxes on any assets placed into the trust. If the grantor continues paying taxes, the assets in the trust can grow tax-free and will not be included as part of the grantor’s taxable estate, because the grantor paid income tax during his or her lifetime. While an IDGT can be created at any time, it can be particularly valuable to fund such a trust when asset values are low, because subsequent growth will not ultimately be subject to estate tax. If you are concerned about the estate tax exemption being lowered at the federal level, this can be a big benefit.
Assets can be transferred to an IDGT either by gift or sale, but a sale can come with fewer complications. The grantor sells assets to the IDGT in return for a promissory note. The loan note will be for a specific term of years and pay enough interest to keep in line with general market performance, but the trust assets will be expected to appreciate more quickly or otherwise generate greater returns than the market. Interest rates may be low at this time and the market down, a note could be issued at a very low rate and still be considered at or above the market. With the expectation that the assets funding the trust rebound, the income those assets generate will likely exceed any interest that has to be paid to the grantor on the loan note and be passed to the beneficiaries outside the grantor’s taxable estate.
For help navigating estate tax changes on the horizon and more, our office is available to help. Please reach out to us today to schedule an appointment.