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What You Need to Know About Intentionally Defective Income Trusts

What You Need to Know About Intentionally Defective Income Trusts

November 09, 2022

Several estate planning tools can be used to transfer wealth from one generation to the next. One such tool is “grantor trust” (e.g., intentionally defective income trust or “IDIT”). This type of trust has been around for many years, and there are several reasons why it might make sense to use one in your estate plan. In this blog post, we will discuss the benefits of IDITs and when they might be most useful.

Wholly-owned “grantor trusts” (e.g., IDITs) are trusts that are intentionally designed to be income taxable to the grantor of the trust. This means that the trust itself will not pay taxes on the income it earns. Instead, the grantor of the trust will recognize the income gains, losses and deductions realized by the trust. Generally, the tax characteristics of such items flow to the grantor of the trust. The advantage of this arrangement is that it can help to reduce the overall tax burden on the estate.

Another potential benefit of IDITs is that they may be used to shelter assets from creditors. If a beneficiary owes money to creditors, the assets in the trust may be protected from seizure. This can be a valuable tool for families with significant wealth who want to ensure that their assets are passed down to future generations.

IDITs can also be used to create a generation-skipping transfer without creating a significant generation-skipping tax. This type of trust may be useful for families who want to transfer wealth to grandchildren or other future generations without incurring multiple levels of estate taxes.

Finally, IDITs may be used to support charitable giving. If the trust permits, the trustee of the trust may distribute income or principal to a charity of the grantor's choice, and the grantor may receive a charitable deduction for the gift as long as the trust remains a grantor trust.

IDITs can be a useful tool for estate planning, but they may not be right for everyone. You should discuss your specific situation with a qualified estate planning attorney to determine whether an IDIT would be a good fit for you.