A device often useful in estate planning goes by the peculiar name intentionally defective grantor trust, or IDGT. The terms of the trust are crafted to prevent the grantor (the wealthy individual who funded the trust) from being considered the owner for purposes of the estate tax. The income tax rules, however, treat the grantor as the owner. Without going into details of how this is beneficial, we can say this is a near-perfect example of having your cake and eating it, too.
IDGTs have been a standard estate planning tool for decades. The answer to one question was not firmly settled, however — until now. There’s a tax rule that adjusts the basis of assets to fair market value at the death of the owner. Does it apply to assets in an IDGT, which are treated as owned by the grantor for income tax purposes but not for estate tax purposes? If so, that would be icing on the cake.
It’s been known for some time that the IRS was preparing guidance on this question. A new IRS ruling on IDGTs has now been published. We expect few will be surprised at the outcome: the IRS says that because these assets are not included in the decedent’s estate, their basis will not be adjusted.
If you want to dig deeper, this article offers more background on the topic.