A tax and estate planning attorney has a wide array of tools that can be implemented to help individuals and families save when it comes to gift and estate taxes. Often, these tools come in the form of complex trusts with even more complex sounding acronyms. For instance, Charitable Lead Annuity Trust (“CLAT”), Grantor Retained Annuity Trust “(“GRAT”), Qualified Personal Residence Trust (“QPRT”), and the Irrevocable Life Insurance Trust (“ILIT”).
On tool, however, is extremely effective and unique–the Intentionally Defective Grantor Trust (“IDGT”). Despite the use of the term “defective”, this trust has a tremendous capacity to allow for the maximization of wealth transfers to younger generations with minimal gift/estate taxes.
Not surprisingly, Mitt Romney (one of many politicians) has benefited greatly from the implementation of an IDGT.
From the San Fransisco Chronicle:
Romney’s vehicle is known as an “intentionally defective grantor trust” or by the acronym IDGT — hence the nickname: “I Dig It.” Such trusts permit donors to give potentially unlimited amounts to children free of estate and gift taxes.
Here’s how they work: the person setting up the trust, like Romney, contributes assets such as an interest in a fund or shares in a company. If he makes that contribution before those assets appreciate — particularly when they are privately held and difficult to value — he can claim the gift tax obligation is low or non-existent since the declared value is low or zero.
If the trust generates any income — such as by selling stock — the eventual tax bill is the responsibility of Romney, not the trust. By paying the capital gains tax, which was 20 percent in the late 1990s and is now 15 percent, he can avoid depleting the funds in the trust — in essence making an additional donation that’s free of gift taxes.
That benefit in particular makes this type of trust “a more powerful driver of wealth transfer in estate planning than almost anything else,” ….
