Defective Grantor Trust

One common type of irrevocable trust is a “defective grantor trust,” commonly referred to as a “DGT”.  While generally an irrevocable trust is treated as a completely separate entity for tax purposes, a defective grantor trust is “defective” for income tax purposes. This “defect” causes the income from the trust to be taxed on the Trustor’s income tax return. The benefit of this type of trust is that it allows the trust property to continue accumulating and compounding without being reduced by income tax.

While income tax is the primary consideration with the defective grantor trust, the provisions of the trust which cause the trust to be taxed to the Trustor can also provide additional flexibility. Some unique provisions of a defective grantor trust are as follows:

  1. Trustor may borrow from the Trust without adequate consideration.
  2. Trustor may exchange Trust assets with assets of equal value.
  3. A person other than the Trustor or person that has an interest in the Trust has the power to add a beneficiary or class of beneficiaries.

The borrow and exchange provisions are especially useful in the case of non- appreciating assets. Since a major benefit of an irrevocable trust is removing appreciation from the Trustor’s estate, there is little value in an irrevocable trust holding non-appreciating assets. If an asset is not appreciating, the Trustor has the ability to replace that asset with a more productive (appreciating) asset, thereby achieving greater estate tax savings.

CONTACT INFORMATION

Lewis Business & Estate Planning, APC
949 South Coast Drive, Suite 555
Costa Mesa, CA  92626
Phone: (714) 581-8808
Fax: (714) 581-8809

 

ATTORNEYS
Christy L. Lewis, J.D., LL.M: clewis@lewisplanning.com
Jessica Ertel, J.D.: jertel@lewisplanning.com


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