By Harry Prabandham · Updated September 28, 2026
Estate & Legacy
Intentionally Defective Grantor Trusts (IDGTs), Explained
An IDGT is outside your estate for estate tax but taxed to you for income tax, so your tax payments and asset sales to it can shift growth to heirs.
Intentionally Defective Grantor Trusts (IDGTs), Explained
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What is an intentionally defective grantor trust?
- It is an irrevocable trust drafted so its assets are excluded from your estate while you are still treated as the owner for income tax.
- The defect is a deliberate grantor-trust power, such as a power to substitute assets of equal value.
- You pay income tax on the trust's earnings, and the trust keeps its full returns for your beneficiaries.
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Full Guide
What is an intentionally defective grantor trust?
- It is an irrevocable trust drafted so its assets are excluded from your estate while you are still treated as the owner for income tax.
- The defect is a deliberate grantor-trust power, such as a power to substitute assets of equal value.
- You pay income tax on the trust's earnings, and the trust keeps its full returns for your beneficiaries.
Is paying the trust's income tax a gift?
- No. The IRS has ruled that the grantor's payment of income tax on grantor-trust income is not an additional gift to the beneficiaries.
- Those payments reduce your estate and let trust assets grow without income tax drag.
- Tax reimbursement clauses exist, but they have to be drafted carefully to avoid estate inclusion.
How does an installment sale to an IDGT work?
- You sell assets to the trust in exchange for a promissory note at the Applicable Federal Rate.
- Because you and the trust are the same taxpayer for income tax, the sale and interest payments are not taxable events.
- Growth above the note's interest rate stays in the trust, outside your estate.
- Trusts are commonly funded with a gift first, so the trust has equity apart from the note.
What are the risks and trade-offs?
- If assets underperform the note rate, little or nothing shifts, and the note still must be repaid.
- If you die with the note outstanding, the note is part of your estate and the income tax consequences are unsettled.
- Assets in an IDGT don't receive a basis step-up at your death; the IRS confirmed this in Rev. Rul. 2023-2.
- Paying the trust's income tax is a real, open-ended cash commitment.
When is an IDGT considered?
- When assets, such as private company stock, are expected to grow faster than the AFR.
- When the grantor has enough other liquidity to pay the trust's income taxes for years.
- When the estate is large enough that the $15 million per-person exemption in 2026 won't cover it.
Key takeaways
- An IDGT separates estate tax and income tax treatment on purpose.
- Your income tax payments are not gifts, which can move additional value out of your estate.
- Installment sales depend on returns relative to the AFR and carry basis and funding risks.
- Rubric coordinates IDGT planning with your estate attorney and CPA; confirm the structure with them.
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