How do you create an intentionally defective grantor trust?
How do you create an intentionally defective grantor trust?
To fund intentionally defective grantor trusts, grantors have two options: make a completed gift to the trust or engage in an installment sale to the trust. A completed gift. Gifts are the most common way to fund an IDGT. The grantor makes an irrevocable, completed gift of the desired assets to the trust.
Does an IDGT file a tax return?
Individual income tax returns (forms 1040 and 540) must be filed by the Grantor each year to report and pay tax on the IDGT income since the IDGT is a Grantor Trust.
What makes a trust an IDGT?
An IDGT is a trust set up by a grantor (i.e., an individual) that is treated as separate from the grantor for federal estate and gift tax purposes but is treated as owned by the grantor for federal income tax purposes.
How is an intentionally defective grantor trust taxed?
With an intentionally defective grantor trust (IDGT), the grantor often transfers assets to the trust through lifetime gifts. Alternatively, he or she can arrange to sell assets to the trust. In this case, there’s no recognition of a capital gain, so no tax liability ensues.
Does an IDGT need an EIN?
The one key thing that all parties should be aware is that the IRS does not require or recommend obtaining an EIN/Tax ID Number for “Grantor Trusts.” The client can use their own social security number when they open the account, because income from the account is to be reported on the individual income tax return of …
Who pays taxes in a intentionally defective grantor trust?
The intentionally defective trust is created as a grantor trust with a loophole that allows the trustor to continue paying income taxes on certain trust assets, as income tax laws will not recognize that those assets have been transferred away from the individual.
Do I have to file a 1041 for a grantor trust?
The general rule is that all grantor trusts must file a Form 1041, which contains only the trust’s name, address, and tax identification number (TIN) (see Regs. Sec. 1.671-4(a)).
What is the benefit of an intentionally defective grantor trust?
An intentionally defective grantor (IDGT) allows a trustor to isolate certain trust assets in order to segregate income tax from estate tax treatment on them. It is effectively a grantor trust with a purposeful flaw that ensures the individual continues to pay income taxes.
Do I need a tax ID number for a grantor trust?
Grantor Trusts. As a general rule, grantor revocable trusts do not need a separate EIN. The trust’s income is reported under the grantor’s SSN because the grantor may, at any time, revoke the trust and regain possession of the property.
Who should be the trustee of an Ilit?
2. Who can serve as an ILIT trustee? The trustee of an ILIT can generally be anyone other than the insured, although naming an “independent trustee” may offer greater flexibility for estate planning.