I Want You to Stop Paying Taxes

Intentionally Defective Grantor Trust (IDGT)

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 Federal Estate Taxes Can Destroy Wealth

Year Federal Exemption Federal Estate Tax Rate

2007 $2.0 million 45%
2008 $2.0 million 45%
2009 $3.5 million 45%
2010 Estate Tax Repealed 0%
2011 $1.0 million 55%

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 State Estate Taxes Can Destroy Wealth
Top State Estate
State State Exemption Tax Rate 2009
Connecticut $2.0 million 16%
Delaware $3.5 million 16%
Illinois $2.0 million 16%
Kansas $1.0 million 3%
Maine $1.0 million 16%
Maryland $1.0 million 16%
Maine $1.0 million 16%
Minnesota $1.0 million 16%
New Jersey $675,000 16%
New York $1.0 million 16%
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 State Estate Taxes Can Destroy Wealth
Top State Estate
State State Exemption Tax Rate 2009
North Carolina $3.5 million 16%
Ohio $338,333 7%
Oklahoma $3.0 million 10%
Oregon $1.0 million 16%
Rhode Island $675,000 16%
Tennessee $1.0 million 9.5%
Vermont $2.0 million 16%
Washington D.C. $1.0 million 16%
Washington $2.0 million 19%

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Understanding an Intentionally Defective Grantor Trust

An Intentionally Defective Grantor Trust (IDGT) is an

irrevocable trust created by a person (the “Grantor”), who
gifts (“seeds”) assets (of at least 10% of the ultimate
purchase price) to the trust, allowing the IDGT to then
purchase the grantor’s assets in exchange for a promissory
note with a specified term.

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Understanding an Intentionally Defective Grantor Trust

Oftentimes, the note will require interest only payments

with a balloon payment of principal at the end of the term.

The Grantor avoids gift taxes upon sale to the IDGT

because the grantor and the trust are the same entity for
income tax purposes.

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Understanding an Intentionally Defective Grantor Trust

Because the grantor ‘intentionally’ violates just enough of

the Internal Revenue Code 671-679 control rules the assets
are removed from the estate – thus the name Intentionally
Defective Grantor Trust.

At the end of the term the remaining assets of the IDGT

are distributed to the named beneficiary (the
“Remainderman”) or placed into a trust for the benefit of
the beneficiary.
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Understanding an Intentionally Defective Grantor Trust

While the grantor is responsible for all income taxes

generated by the IDGT, those same income tax payments
provide another “tax free gift” because they retain the
maximum value of the IDGT.

Translation: the trust’s value does not decline due to tax

payments.

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Understanding an Intentionally Defective Grantor Trust
The minimum interest rate on the promissory note is
determined by the Internal Revenue Code 1274(d)
Applicable Federal Rate (AFR), oftentimes called a
“hurdle rate”.
The November 2009 rate of 2.6% (for mid-term loans) is
significantly lower than the 5.2% rate as recent as August
of 2006, making the IDGT more appealing now than many
periods over the last 10 years.
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Understanding an Intentionally Defective Grantor Trust

The primary reason for establishing an IDGT is to remove

net profits from the estate, with net profits defined as any
excess return above the hurdle rate.
The lower the hurdle rate, the easier it is to remove more
assets from your estate.
Translation: it is easier to earn more than 2.6% than it is to
earn more than 5.2%.

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 Example of Intentionally Defective Grantor Trust

Grantor Gifts (“Seeds”) Assets to IDGT $ 300,000

Equal to 10% of Ultimate Purchase Price

Grantor Sells Assets to IDGT in Exchange $3,000,000

for a Promissory Note with a 9 Year Term

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 Example of Intentionally Defective Grantor Trust

Grantor Receives IRC 1274(d) AFR of $ 702,000

2.6% Each Year for 9 Years

Grantor’s Assets Returned $3,000,000

But…

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 Example of Intentionally Defective Grantor Trust

Over the 9 Years, Assets Grew to $6,000,000

After Grantor’s Original Asset Returned ($3,000,000)

Remainderman Receives Balance $3,000,000

And…
Grantor Removes Same Amount from Estate $3,000,000
Plus Any Income Taxes Paid

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 Conclusions

Federal and state estate taxes can destroy wealth.

IDGTs remove net profits from the estate.

Establishing an IDGT with a low hurdle rate increases the

likelihood of removing a larger amount of assets from
your estate – potentially eliminating your federal and state
estate tax obligations.

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Aaron Skloff, AIF, CFA, MBA
Chief Executive Officer
Skloff Financial Group

908.464.3060

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