My passion for being an estate planning attorney comes from one thing: my dislike for taxes. As it currently stands, the government taxes you your entire life—on your earnings, on property you already rightfully own, on the goods and services you need to survive—and then, once you’ve finally worked hard enough to build a decent estate, they tax you after you die.
Let’s just assume, for example, that you are right at the estate tax exemption line and have significant investments, securities, and other appreciating assets. Clearly, if those assets keep growing, you’ll end up with a taxable estate. However, there’s one powerful tool we can use to freeze the value of those assets right at that $13.99 million mark: the intentionally defective grantor trust (IDGT).
How Does an IDGT Work?
An IDGT works like a sale of assets to an entity—in this case, the trust. You create an irrevocable trust, structured intentionally so that you’re still treated as the owner for income tax purposes, but not for estate tax purposes. Then you “sell” the appreciating assets to the trust in exchange for a promissory note. This sale is income-tax neutral because you’re considered the same taxpayer as the trust under the grantor trust rules, but the assets are out of your estate for estate tax purposes.
If that’s too abstract, let’s look at it this way: if John sells his house to his brother Jim, Jim might hand him a promissory note—a written promise to pay for the house over time. No cash changes hands up front, just a promise to pay. An IDGT functions in much the same way. You transfer $13.99 million of appreciating assets into the trust, and in return, the trust gives you a piece of paper promising to pay you $13.99 million (plus interest). That note does not appreciate—it’s fixed. But the assets inside the IDGT? They continue to grow, and that growth passes outside your taxable estate.
From a tax perspective, you now only hold a note worth $13.99 million, not the growing portfolio you used to own. The future appreciation on those assets avoids estate tax and passes directly to your beneficiaries—completely gift- and estate-tax free.
What Are the Drawbacks of an IDGT?
No strategy is perfect, and IDGTs come with some real-world limitations:
- Liquidity is important. The trust has to make interest payments on the promissory note. That means the assets inside the trust must generate cash flow or be partially liquid. It doesn’t work well with assets that are illiquid or non-income producing—like raw land or artwork—unless paired with other strategies.
- You can’t be in control. You cannot act as the trustee of your own IDGT, and it’s generally not advisable for your spouse to serve either. This means you are handing over control of those assets to a third-party trustee (often a trusted advisor or corporate fiduciary). For some clients, that’s a dealbreaker. For others, it’s a welcome tradeoff for removing appreciation from their taxable estate.
- Valuation matters. The IRS may challenge the valuation of the assets you’re selling to the trust. This is especially true with closely held business interests or family limited partnerships. A qualified appraisal is often essential.
Why Should I Use an IDGT?
If your estate is above the exemption threshold—or you expect it to be—an IDGT offers one of the most effective tools to remove appreciation from your taxable estate without triggering gift tax. Some of the biggest advantages include:
- Estate Freeze: Locks in the value of your estate for estate tax purposes while allowing the upside to escape taxation.
- Income Tax Efficiency: Since you’re still taxed on the income, the trust’s assets grow without drag, and your payment of the income tax is not considered a gift.
- Legacy Leverage: When structured correctly, the value that grows inside the IDGT can be massive—creating multigenerational wealth that bypasses estate tax entirely.
How Do I Know if an IDGT is Right for Me?
The IDGT is not a one-size-fits-all tool. It requires precision, planning, and an understanding of your long-term goals. But for clients who have estates nearing or exceeding the federal exemption—and who want to push back against the IRS’s reach beyond the grave—this strategy is one of the most powerful options in the estate planner’s toolkit.
To see if an IDGT is right for you, schedule a free consultation with our Franklin estate planning attorney by calling 629-400-6447, or simply fill out our contact form and a member of our team will reach out soon.
About the Author
Thomas Steelman is an attorney at Crow Estate Planning and Probate, PLC. Previously, he worked at a prominent estate planning firm in Annapolis, Maryland, bringing a wealth of knowledge in trust planning to assist clients with succession and tax planning. He graduated from Syracuse University with a Bachelor of Arts in Political Science, and a Bachelor of Arts in Writing and Literature Studies. He later went on to complete his Juris Doctorate from the University of Miami School of Law. Thomas assists our estate planning and business planning clients in the greater Nashville and Franklin communities. Learn More.
Licensed in Tennessee