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McCurrie McCurrie
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Using defective trusts for $5 million in tax-free gifts, part 2

In our last post, we introduced the idea of intentionally defective grantor trusts. Intentionally defective grantor trusts (IDGT) earned their name because of the way in which they enable grantors to give tax-free gifts. Property that is given through an IDGT is considered complete for gift and estate tax purposes. However, the grantor still owns the assets and is responsible for any income tax liability.

If you are interested in using an IDGT, it may be beneficial to work with an attorney to help ensure all the details are covered. However, we can give you a basic understanding of what to expect if you are considering a defective trust.

Once you or your lawyer has drafted the IDGT, you will begin to fund the trust. Legally, there is no minimum amount that a grantor must provide, but many practitioners share the same beliefs. They believe that 10 percent of the fair market value of the asset must be provided before the trust is given.

In addition, the initial funding of an IDGT is a taxable gift. That means an individual can use some or all of the $5 million in tax-free exemptions. Once the IDGT is funded, the grantor sells assets to the trust and receives an installment note for the sale. To help ensure the grantor does not receive any additional tax penalties, the loan rate specified on the installment note should be equal or higher than the Applicable Federal Rate.

Given the uncertain future of the gift-tax exemption and a lack of knowledge regarding the future of tax law, it may be beneficial to begin working on your IDGT now.

Source: AdvisorOne, "Estate Planning: Time Running Out on $5 M Gift-Tax Exemption," Gavin Morrissey, 15 June 2011

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