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Your IDGT Guide: How to Strategically Use IDGTs Before 2026

Law Office of Todd A. Wilson > Estate Planning  > Your IDGT Guide: How to Strategically Use IDGTs Before 2026

Your IDGT Guide: How to Strategically Use IDGTs Before 2026

Your IDGT Guide: How to Strategically Use IDGTs Before 2026 | Estate Planning Lawyer in Austin, TX

Discover How IDGTs Are Helping Some Folks Prepare for Changing Estate Tax Exemptions

Intentionally defective grantor trusts (IDGTs) can be highly effective in preserving, maximizing, and transferring certain assets — especially if you set an IDGT up before Jan. 1, 2026. That’s when lifetime estate tax exemptions could drop drastically, taking millions in available exclusions off the table if federal laws don’t change before Dec. 31, 2025.  

With the clock counting down and limited time to take action, there may be no better time than right now to consider an intentionally defective grantor trust. 

To help with that, check out these IDGT FAQs, with concise answers from top estate planning lawyers in Austin, TX:

This guide is designed to walk you through how IDGTs could work in your estate plan in less than 5 minutes. For more answers about IDGTs or any aspect of estate planning or probate in Texas, contact the Law Office of Todd A. Wilson, also known as TAW Law Texas.

What Are Intentionally Defective Grantor Trusts (IDGTs)?

An IDGT is an irrevocable trust that has been set up with a loophole, allowing the trust to “own” certain assets while the grantor is still responsible for paying income taxes on those assets. Typically, tax responsibilities follow ownership, so the parties who own a given asset would usually be responsible for paying taxes on any income generated by those assets. 

With the intentionally defective grantor trust, however, the “defect” lets grantors (the people who set up the trusts):

  • Remove certain assets from their estates: The assets are held by the trust instead.
  • Continue paying taxes on the assets held by the IDGT: This essentially means that the trust doesn’t have to deplete its resources on taxes.
  • Reduce the overall value of their estate: There’s usually a two-fold reduction here, with the estate dropping by the value of the assets transferred into the trust and the related income taxes for those assets.
  • Preserve the value of the assets held by IDGTs: The assets in IDGTs can be shielded from creditors while reserving any appreciation of those assets for the designated beneficiaries
  • Take advantage of current estate tax exemptions and gift tax exclusions: The higher exclusions available until 2026 were established by the 2017 Tax Cuts and Jobs Act (TCJA), which sunsets in 2026. That means there are roughly two years (as of the date this was published) to use the current estate tax exclusions to fund an IDGT.
  • Potentially bypass the estate and gift tax exemptions altogether: Grantors can sell assets to a trust to avoid invoking gift tax exemptions. This offers more flexibility in tailoring estate planning strategies, letting folks decide whether to leverage existing estate and gift tax exclusions to fund an IDGT or reserve those exemptions for other uses. 

While various parties can set up IDGTs with different goals in mind, like preserving business assets, these trusts commonly come into play with generational wealth transfer and: 

  • Grantors often being parents and/or grandparents
  • Beneficiaries generally being children and/or grandchildren
  • Asset distribution to the beneficiaries usually occurring after the grantor’s death

With that framework, intentionally defective grantor trusts can be a powerful piece of the estate planning puzzle for many, regardless of the value of their estate.

How Do IDGTs Work?

Intentionally defective grantor trusts work unlike any other trust by design. Specifically, IDGTs are set up with an “intentional defect” for tax purposes, letting the grantor continue paying income taxes for assets held by the trust. That effectively means that IDGTs are “intentionally defective” from a tax standpoint, not an estate planning one. 

Here’s a rundown of how intentionally defective grantor trusts generally work:

  1. A grantor (you) creates an IDGT: To establish this new trust, you typically have to draft trust documents, name beneficiaries, specify the terms of asset distribution, and designate a trustee. The trustee of the IDGT must be someone other than you, the grantor, if you don’t want the trust’s assets to be included in your estate.
  2. You fund the IDGT: Assets can be transferred into or sold to an intentionally defective grantor trust. While “gifting” assets to an IDGT may trigger gift tax exemptions, selling assets to the trust usually won’t. Either way, once the trust has been funded, the assets held by the trust will be removed from your estate and ownership (again, as long as the trust has been set up properly).
  3. You can “sell” more assets to the IDGT later: After the intentionally defective grantor trust is funded, you can keep adding to the trust’s assets by selling more items to the trust. If or when this occurs, you’ll usually get a promissory note from the trust, detailing the terms and timeline of payment.
  4. You pay income taxes on the IDGT assets: When assets held by intentionally defective grantor trusts generate income, grantors cover the taxes on those earnings. That alleviates the need to pay taxes from the trust’s funds, leaving more in the trust for the beneficiaries while reducing the value of the grantor’s estate.
  5. IDGT assets pass to beneficiaries after you pass away: If you have an outstanding promissory note from the trust when you pass away, the total value of the note will be added to your estate. The assets held by the trust, as well as any appreciation of those assets, will not be included in your estate, however. Instead, they’ll generally be distributed to beneficiaries according to the terms of the trust. 

With this setup, intentionally defective grantor trusts have been popular vehicles for purchasing life insurance and transferring death benefits to beneficiaries without having to probate the proceeds (or pay estate taxes on them). To do that: 

  • Trustees of IDGTs may use the assets or income of the trust to take out a life insurance policy for the grantor.
  • The trust will then “own” the policy, just as it “owns” the other assets used to fund the intentionally defective grantor trust.
  • When the grantor passes away, the death benefits from the policy would be paid out to the trust and then, distributed to the beneficiaries, according to the terms of the trust. 

As straightforward as IDGTs may seem, don’t make the mistake of misconstruing them as simple or “universal” estate planning solutions. Nothing could be further from the truth when it comes to intentionally defective grantor trusts. 

The truth is that IDGTs are complex, and they won’t benefit everyone. In fact, the potential advantages of IDGTs usually only arise when these trusts have been structured, funded, and administered properly under the right circumstances.

What Assets Can Fund IDGTs?

Intentionally defective grantor trusts can be funded with various assets, including (but not limited to): 

  • Cash and/or collectibles
  • Life insurance policies
  • Family heirlooms
  • Securities, stocks, and bonds
  • Business interests
  • Real estate holdings 
  • Royalties and residuals

When it comes to funding IDGTs, it’s also crucial to know that: 

  1. Certain assets can be better suited for IDGTs than others: Typically, these trusts can offer more benefits when they are funded with appreciating and income-generating assets, as opposed to items that depreciate over the term of the trust. That’s because when assets are appreciated in the trust, the appreciation and the assets used to fund the trust in the first place can “pass through” to beneficiaries, without probate and estate tax obligations coming into play.
  2. Assets may be swapped out of IDGTs: Grantors usually retain the right to exchange assets of equal value with the trust. So, for instance, if the trust holds cash or jewelry and the grantor wants to swap that out for real estate of the same value, (s)he generally has the right to make that exchange without requiring any explicit consent or approvals from trustees or anyone else, as long as the exchanged items are valued the same.
  3. The choice to gift or sell the assets to the trust matters: Gifting assets to the trust can invoke the gift tax exemption while selling assets to the trust would generally require promissory notes with repayment terms. There’s no “good” or “bad” option here, as gifting and selling can have distinct pros and cons, depending on the circumstances and the grantor’s needs.
  4. Gifting and selling can be a combined strategy: It’s not an all-or-nothing choice to fund an intentionally defective grantor trust with a gift versus the sale of some asset. Instead, grantors can give some assets, like 10% of the total trust funds, while selling the rest of the assets to the trust (90% of the trust’s funds in this example).
  5. SLATs are a variation of IDGTs: Spousal Lifetime Access Trusts (SLATs) are specific versions of IDGTs that name a grantor’s spouse as the trust beneficiary. There can be unique advantages to SLATs and IDGTs, and some estate plans could benefit from either or both of these tax mitigation trusts. 

Why Should I Set Up an IDGT Before 2026?

Intentionally defective grantor trusts created before 2026 could offer various benefits, including (and not limited to):

  • “Freezing” asset value for tax purposes: When you fund an IDGT with real estate, business interests, or other assets that are expected to appreciate, their value gets “locked in” at the time of transfer for tax purposes. That can mean any growth and gains from those assets get to thrive in a tax-free environment. So, if you funded a new IDGT with commercial property on Jan. 1, 2024, the value of the property on Jan. 1, 2024, is the value “locked in” for tax purposes while the appreciation stays “off the books” where Uncle Sam is concerned.
  • Reducing the value of an estate: Appreciating assets can push estates into the highest estate tax brackets. That could mean a harrowing 40% estate tax rate if the estate is left “holding the bag” with tons of taxable assets. If you’ve set those assets up in an intentionally defective grantor trust, however, you can remove the value of the assets and their appreciation from your taxable estate. Plus, you can further reduce the value of your estate by selling more assets to the IDGT later and covering any tax obligations, like income taxes on the appreciation.
  • Taking advantage of current gift and estate tax exemptions: Between now and 2026, you could have roughly $5 million to $15 million more in available exclusions, depending on your marital status. As of Jan. 1, 2026, those gift and estate tax exemptions could disappear for good (if no new tax laws are passed before then). That means you could have the chance to leverage millions — to tens of millions — more in gift and estate tax exclusions before the TCJA sunsets. With that, you could fund one or more IDGTs with gifts or leverage the exemptions in other tax-savvy ways that help you achieve your estate planning goals.
  • Changing out assets before Jan. 1, 2026: Since IDGTs give you the power of substitution, you reserve the right to exchange any assets held by the trust at any point. That means you can exchange depreciating assets for appreciating ones, potentially giving more to an intentionally defective grantor trust before the gift and estate tax exemptions change. 

There can be additional benefits of IDGTs before 2026, and you don’t have to be mega-rich to enjoy these advantages. 

What Should I Consider Before Setting Up an IDGT?

Intentionally defective grantor trusts, like GRATs and other tax-savvy trusts, can offer several benefits, but that doesn’t mean they’re for everyone. 

To avoid putting the cart before the horse with IDGTs — and to help you make the most of these trusts if you do create them — here are a few important issues to consider first: 

  • IDGTs are complicated trusts: If intentionally defective grantor trusts are not structured, funded, or administered properly, they may not provide the benefits grantors want or expect. Creating effective IDGTs typically requires the guidance and experience of a trust lawyer who understands the applicable tax codes, IRS rules, and other regulations.
  • IDGTs don’t put grantors “in the driver’s seat”: Grantors can retain some control over an IDGT when it comes to exchanging assets, changing trust terms, or even making certain asset distributions. That does not mean that grantors should serve as trustees, and it does not give grantors carte blanche for making changes or accessing the trust’s assets. Instead, it’s better to think of IDGTs as irrevocable devices that hold assets for beneficiaries, rather than being a holding spot for assets you’d like to own again.
  • IDGT trustees should be chosen carefully: New tax issues could arise if you appoint certain folks as IDGT trustees. That could occur, for instance, with a spouse or a child as the trustee of an intentionally defective grantor trust, but it doesn’t mean these relatives can’t serve in the trustee position. Still, many folks rely on knowledgeable professionals, like lawyers and accountants, to serve as trustees for IDGTs.
  • What works today may not work tomorrow: Your needs, your estate, and the laws can all change from year to year, and that can happen without you even taking notice. That’s why it’s prudent to check in on estate plans routinely, going over documents, objectives, and devices like IDGTs to make sure they’re still the right fit — and the best options for — your estate planning needs. 

A good place to start, these considerations can open up new questions and concerns that can be best to go over with an experienced Austin trust attorney at TAW Law Texas. 

Our team has vast experience with intentionally defective grantor trusts, and we are ready to help you decide if an IDGT may be right for you and your estate plan.

How Can I Get More Info About IDGTs?

Email TAW Law Texas or call us at 512-827-9212 for a free, no-obligation consultation with one of our 5-star estate planning lawyers in Austin, Texas.

Focused on providing exceptional value and extraordinary solutions, our Austin attorneys are proud to offer comprehensive estate planning and probate services throughout Travis County. From estate planning and trust administration to probate litigation, flat-fee uncontested probate, and beyond, you can count on TAW Law Texas for the highest-quality counsel, white-glove service, and true peace of mind with your estate plan.To discover more without paying a dime or committing to anything, simply contact us today.

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Todd A. Wilson

Todd A. Wilson has been practicing law since 2007, with the aim of educating all strata of society and sharing crucial insights about the importance of estate planning, probate, and more.

The Law Office of Todd A. Wilson (also known as TAW Law TX) offers affordable estate planning and probate services.