Question
An estate planner is designing an irrevocable trust for a high-net-worth client. The client wants to ensure that the trust income is taxed to himself personally during his lifetime to allow the trust principal to grow unencumbered by income tax liabilities, while successfully removing the assets from his gross estate for federal estate tax purposes. What structural mechanism under the Internal Revenue Code achieves this planning goal, and what is the income tax status of such a trust?
Tap card to flipAnswer
The mechanism is an intentionally defective grantor trust (IDGT) . Rationale: An IDGT is intentionally structured to trigger the grantor trust rules (Sections 671679) for income tax purposes, making the grantor personally liable for all federal income taxes on trust earnings. Concurrently, the transfer is structured as a completed gift for estate tax purposes (under Section 2511), meaning the assets are excluded from the grantors gross estate at death. The grantors payment of the trusts income tax liability operates as a tax-free economic gift to the beneficiaries, maximizing trust asset compounding.
Tap card to flip back