There are many different acronyms that are used to describe estate planning devices, and some of the terms that they represent are a bit confusing. One that may fit this description is the intentionally defective grantor trust.
This type of trust may be a viable option if you are seeking to reduce the taxable value of your estate for eventual distribution to your heirs.
Because these trusts are irrevocable, any assets you convey into the trust are no longer included in your estate for estate tax purposes.
What makes the trust “defective?”
Most irrevocable trusts shift the tax burden from the grantor to the trust. However, an intentionally defective grantor trust allows the grantor to retain responsibility for the payment of income taxes on income generated by the trust.
Because the grantor is paying the taxes from the grantor’s individual assets, the value of the trust can continue to grow without being continually sapped by income taxes. This results in a greater distribution to the beneficiaries of the trust.
Paying the income taxes also benefits the grantor because the tax payments reduce the taxable value of the grantor’s estate.