What is Intentionally defective grantor trust?
In short
An intentionally defective grantor trust is an irrevocable trust drafted so its assets are outside the grantor's estate, while the grantor is still treated as the owner for income tax, for example by keeping a power to swap assets.
Key takeaways
- The grantor pays the trust's income tax, which is effectively an extra tax-free gift to the beneficiaries.
- Selling assets to the trust for a note isn't a taxable sale, because the grantor is selling to themselves for income tax.
- Assets in the trust don't get a step-up in basis at the grantor's death.
Where it's tested
TCP: Estate & Gift Tax Planning — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A client's total estate is well below the $15 million exemption. The client asks whether to gift highly appreciated stock to children now or hold it until death. From a pure tax standpoint, which is generally better and why?