By Attorney David M. Grant
President Obama’s administration has recently proposed a change to the federal income and estate tax laws that would make the use of the Intentionally Defective Grantor Trust (“IDGT”) strategy essentially useless. Important elements of the administration’s IDGT proposal can be found here.
As a summary of the key features of the proposal, it would:
- Include the assets of an IDGT in the gross estate of the grantor for estate tax purposes;
- Subject to gift tax any distribution from the IDGT to one or more beneficiaries during the grantor’s life; and
- Subject to gift tax the remaining IDGT assets at any time during the grantor’s life if the grantor ceases to be treated as an owner of the IDGT for income tax purposes.
The only good news for estate planning clients related to Obama’s proposal is that it would only apply to new IDGTs created after enactment. In other words, IDGTs that have already been created would most likely be “grandfathered in.” With that said, the administration’s proposal seems to say that any later contributions to grandfathered IDGTS made after enactment would be subject to the new rules. It should also be mentioned that the proposal also indicates that the new rules will not apply to any form of an IDGT otherwise explicitly allowed under the tax code, including qualified personal residence trusts (QPRTs) and grantor-retained annuity trusts (GRATs).
The other bright ray of hope is that these new proposed rules are merely that, they are proposed. This is not the current law and using an IDGT strategy is still one of the most viable estate tax planning approaches now available to those wanting to reduce or eliminate transfer and estate tax liability.
If you would like more information regarding Estate Planning and the current and proposed Estate Tax laws, please give us a call at 702-938-2244 or contact us online by clicking here.