Intentionally Defective Grantor Trust (IDGT)
Also: IDGT, intentionally defective grantor trust, defective grantor trust
An irrevocable trust designed so that the grantor remains the income tax owner (paying tax on trust earnings) while the trust assets are excluded from the grantor's taxable estate.
An IDGT is an irrevocable trust with one or more grantor-trust powers that make the grantor responsible for income tax on trust earnings, without those same powers causing estate inclusion. The asymmetry is deliberate. The grantor pays income tax on trust earnings, which is effectively an additional tax-free gift to beneficiaries (the trust principal grows unreduced by income tax). A classic structure is a sale of appreciating assets from grantor to IDGT in exchange for a promissory note at the AFR, freezing the note value while appreciation accrues inside the trust.
Example: a founder sells $8 million of pre-IPO shares to her IDGT for a nine-year AFR note. The note accrues at roughly 4.5%, $360,000 interest per year. The shares IPO and rise to $24 million. The trust repays the $8 million note with interest; the $16 million appreciation passes to heirs outside the taxable estate. Each year the grantor pays income tax on trust dividends and capital gains, further transferring wealth.
Common mistake: funding an IDGT without an initial seeding gift of at least 10% of the installment sale value. Seeding supports the note’s bona fide debt character.
IDGTs matter at pre-IPO wealth transfer, at generation-skipping planning, and at using the $13.99 million (2025) exemption before sunset.