Intentionally Defective Irrevocable Trusts: A Great Way to Transfer Wealth, Especially In Low Interest Rate Environments
September 2, 2011
Authored by: Mark Newcomer and John Readey
The current low interest rate environment provides excellent opportunities to transfer wealth to family members. One approach commonly used to accomplish this goal is to sell assets to an intentionally defective irrevocable trust (“IDIT”). An IDIT is an irrevocable trust for the benefit of someone other than the creator of the trust (the “Settlor”), perhaps Settlor’s descendants. However, the “intentionally defective” component of the IDIT means that, for income tax purposes, the assets in the trust will continue to be treated as owned by Settlor. Thus, Settlor’s sale of assets to the IDIT will not result in income tax consequences. Additionally, Settlor’s payment of income taxes on the income earned by the IDIT provides an additional means of reducing Settlor’s taxable estate, while allowing the benefits of the income earned by the IDIT to benefit Settlor’s descendants.
Typically, Settlor will take back a promissory note for the assets