Understanding the Intentionally Defective Grantor Irrevocable Trust (IDGIT)
By Attorney Bryce Kaufman
When it comes to estate planning, savvy individuals and families seek strategies to minimize taxes, protect assets, and ensure effective generational wealth management. An Intentionally Defective Grantor Irrevocable Trust (IDGIT) may have an unassuming name, but it is a powerful and widely used estate planning tool. This trust structure reduces future estate tax exposure while promoting financial literacy and multi-generational wealth planning.
Why Consider an IDGIT?
As a first step in estate planning, we typically recommend our Living Trust Package, which helps clients avoid the costly and public probate process, plan for a surviving spouse and beneficiaries, and ensure a smooth transition of assets in case of incapacity. It can also maximize estate tax savings by doubling the state estate tax exemption and shifting assets out of the estate upon the first spouse’s death – while still allowing the surviving spouse access as needed.
However, clients with assets exceeding $2,000,000 in Oregon or $4,386,000 in Washington (for married couples) and $1,000,000 in Oregon or $2,193,000 in Washington (for single individuals) may require additional estate planning strategies. Those whose estates surpass the state or federal estate tax exemption should consider the advantages of irrevocable trusts – specifically, the IDGIT.
What is an IDGIT?
Unlike revocable trusts, where the grantor retains control and access to assets, irrevocable trusts are structured so the grantor cannot make significant changes or directly access the assets. An IDGIT allows the grantor to transfer assets to beneficiaries, effectively removing those assets – and their appreciation – from the grantor’s taxable estate.
While the grantor cannot serve as a trustee or beneficiary, a designated beneficiary (such as an adult child) may act as trustee, depending on their age and financial maturity. The grantor’s spouse can also serve as a trustee. Trustees manage assets for specific purposes, such as a beneficiary’s health, education, maintenance, and support (HEMS). These trusts can be tailored to align with the grantor’s financial goals and family circumstances.
The “intentionally defective” aspect means that, for income tax purposes, the trust is not separate from the grantor. As a result, the grantor, not the beneficiary, reports and pays income taxes on trust-generated income, such as dividends and rent. While this obligation reduces the grantor’s taxable estate, the tax payments are not considered additional gifts. This structure provides an effective way to transfer wealth while minimizing estate taxes.
How is an IDGIT Used?
IDGITs are versatile tools that can be used at various stages of a beneficiary’s life. Below are some key scenarios where they provide significant advantages:
Families with Young Children
Early estate tax planning can yield substantial long-term benefits. Gifts placed in an IDGIT early in a child’s life have more time to grow, resulting in greater estate tax savings. For example, a $15,000 gift to a 10-year-old could potentially grow to nearly $200,000 over several decades, saving tens of thousands in estate taxes. Depending on the tax bracket, this could translate to $20,000–$40,000 in Oregon or Washington estate tax savings, plus an additional $80,000 in federal estate tax savings if subject to federal estate tax.
Without an IDGIT, a child who turns 18 and gains full access to a large inheritance may not have the financial maturity to manage it wisely. By using an IDGIT, a grantor can structure the inheritance with built-in safeguards and financial education, ensuring responsible use of the funds.
Beneficiaries at Age 18
At age 18, a beneficiary can become their own trustee, fostering financial responsibility and encouraging discussions about wealth management. To ensure responsible oversight, the grantor can implement safeguards such as:
- The ability to remove the trustee at any time.
- Requiring periodic accountings to promote accountability.
- Restricting access to assets until a certain age or for specific purposes, such as education.
Some families choose to restrict a beneficiary’s use of IDGIT assets to education expenses until age 25. They believe that when their children are involved in the management of funds for their own college education, they have a greater potential to view college as an investment.
In recent years, families have become more engaged in discussions about wealth and investing, leading to notable positive outcomes. Early financial conversations help young adults develop strong money management skills, often giving them financial acumen far beyond their years – skills that continue to serve them well into adulthood.
Adult Children & Generation-Skipping Trusts
For grantors with financially savvy adult children, IDGITs can provide substantial generational tax benefits. If an adult child already has a taxable estate, or if an inheritance would push them into one, an IDGIT can be structured as a generation-skipping trust (GST).
This means that the assets placed in the IDGIT are not subject to estate tax upon the grantor’s passing, nor will they be taxed in the beneficiary’s estate. This multi-generational tax planning strategy ensures long-term preservation of wealth. The adult child, serving as trustee, can access assets for HEMS purposes while also managing funds for their own children’s benefit.
The Lasting Impact of an IDGIT
Beyond the financial benefits, IDGITs encourage meaningful family discussions about wealth and responsibility. These conversations lay the groundwork for lifelong financial literacy and intergenerational wealth preservation.
By strategically structuring an IDGIT, grantors can provide for spouses, children, grandchildren, and charitable causes while significantly reducing tax liabilities.
If you’d like to explore how an IDGIT could fit into your estate planning strategy, contact us today to discuss your options.
Kylie Taylor
Client Service Coordinator
What is your all-time favorite book or movie?: A Way of Kings by Brandon Sanderson is my favorite book. I love it so much that I named my cat after my favorite character.
What is your favorite food: Eggs benedict, without a doubt.
Most memorable place you have vacationed: Traveling to Venice, Italy was on my bucket list for as long as I can remember, so getting the chance to visit in 2022 was truly a dream come true.
Creamy Cauliflower Soup*
Ingredients:
- 1/2 pound sliced bacon, cut into 1/2-inch pieces
- 1 medium onion, finely chopped (about 1 1/2 cups)
- 6 scallions, white and pale green parts only, thinly sliced
- 4 medium cloves garlic, thinly sliced
- 1 quart homemade or store-bought low-sodium chicken stock, plus more as needed
- 2 bay leaves
- 1 cup half-and-half or heavy cream
- 1 head cauliflower, cut into florets
- Kosher salt and freshly ground black pepper
Directions:
- Heat bacon in a large Dutch oven over medium-high heat, stirring constantly until bacon is completely crisp. Remove from Dutch oven with a slotted spoon and set aside, leaving fat in Dutch oven.
- Add onions, half of scallions, and garlic, and cook, stirring constantly and scraping up browned bits from the bottom of the pan until onion is softened, about 5 minutes.
- Add chicken stock, bay leaves, half-and-half (or cream), and cauliflower. Season to taste with salt and pepper. Cover and cook until cauliflower is completely tender, about 30 minutes.
- Working in batches, blend soup until completely smooth (if you don’t have a very powerful blender, remove the bay leaf before blending. If an extra-smooth soup is desired, pass the soup through a fine-mesh strainer after blending); if soup is too thick, whisk in additional hot chicken stock, 1/2 cup at a time, until you’ve reached the desired consistency. Season to taste with salt and pepper and serve sprinkled with crisp bacon pieces and remaining scallions.
*Source: Serious Eats
Estate Planning & Peace of Mind
Have you found yourself making excuses for why not to get your estate in order? Maybe you’re convinced that you really don’t need estate planning. If you have assets and loved ones, you need an estate plan. Having an estate plan that is right for you ensures your loved ones are taken care of and that the transition is as easy as possible.
Attend one of our complimentary estate planning webinars and see for yourself. Having your estate plan prepared and understanding the why’s behind the importance of estate planning can bring you the peace of mind you have been needing.
From Our Clients
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