The use of an intentionally defective grantor trust (IDGT) may be an efficient way for Oklahoma residents to transfer wealth. This is because assets held in the trust don’t count toward the final valuation of the grantor’s estate for tax purposes. Furthermore, any taxes related to income generated by trust assets are paid by the grantor as opposed to the trust or the beneficiaries.
How an IDGT works
Like most other trusts, assets held in an IDGT are not part of the grantor’s estate. This means that they may serve to reduce an estate’s taxable value as well as reduce the chances that trust assets are seized by creditors. However, since the trust is defective from an income tax perspective, the grantor is required to pay taxes on any proceeds generated by its assets. However, by not paying taxes with trust assets, items held inside of the IDGT effectively appreciate tax-free over a period of years or decades.
An IDGT can be an alternative to gifting
As assets in an IDGT have significant potential for growth, creating such a trust may be ideal compared to making a gift. This is because the compounding effect means that you can reach your estate planning goals using a smaller portion of your gift exemption. Furthermore, as assets may potentially be left in a trust for decades, it may be possible to benefit several generations with a single contribution to an IDGT.
Adding a trust to your estate plan may bestow many benefits both now and in the future. For instance, protection from creditors may help to ensure that assets aren’t lost or squandered before your children or grandchildren have a chance to make use of them. Any trust that you create will typically take effect the day it’s executed.