In this edition of M&B Monthly…
• Letter from the President: Intentionally Defective Grantor Irrevocable Trusts (“IDGIT”)
• A little about us…Employee Profile with John Boylston (and his family’s Super Easy Creme Brûlée French Toast)
• Estate Planning Can Save Thousands
• We’re Hiring!
• Be part of our new M&B Thank You Club
Letter from the President, Justin Martin
This article looks at the “Intentionally Defective Grantor Irrevocable Trust (IDGIT)”, an unglamorous title for a very common estate planning tool that positions assets in a way that further limits future estate tax exposure, while providing a mechanism to promote family financial literacy and generational estate tax planning.
Why choose an IDGIT?
As the initial estate planning step for our clients, we typically recommend our Living Trust Package. This is the first step to avoid a costly and public probate process, plan for the surviving spouse and eventual beneficiaries, and prepare for succession during times of incapacity. This also facilitates estate tax savings by doubling the state estate tax exemption and getting as many assets out of the estate at the death of the first spouse, while still allowing the surviving spouse to access the assets as needed.
However, for married clients with assets of more than $2,000,000, or single clients with assets of more than $1,000,000, there can be more to do from here. Clients with assets in excess of the state estate tax exemption and clients projected to have an estate in excess of the federal estate tax exemption should consider the wonderful wonderful world of irrevocable trusts.
What is an IDGIT?
Distinguished from revocable trusts, where the grantor (original owner of the assets) can change terms like beneficiaries and access the trust assets, irrevocable trusts for tax planning provide that the grantor cannot make certain changes or access the assets, for the most part. An IDGIT is an irrevocable trust that allows a grantor to transfer assets to beneficiaries, thereby removing such assets, and the growth of such assets, from the owner’s estate.
While a grantor cannot be a trustee or beneficiary of an IDGIT, the desired beneficiary can be a trustee, depending on the beneficiary’s age and maturity. The spouse of the grantor can also be a trustee. The trustee is able to use such assets for a defined standard, like the beneficiary’s health, education, maintenance, and support (“HEMS”). These trusts can be tailored specifically based on the desires, goals, and circumstances of the grantor.
The intentionally defective grantor part of the name means that the trust does not pay income taxes. In fact, the grantor still reports and pays taxes on the trust income (e.g., dividends, rents, etc.). Since the grantor pays the income tax, it further reduces his or her estate, while the payment of such income tax is not considered an additional gift (note that this is an optional term that can be tailored).
How is an IDGIT used?
The following are some common circumstances when IDGITs are ideal. A single IDGIT could start with a young child and then transition through each subsequent phase of his or her life. Missed the young child phase? No worries, set one up for a grandchild or start an IDGIT at whatever phase fits your circumstances.
Families with young children. The earlier we start estate tax planning, the more our lifetime gifts command a greater bang for the buck because the gift has more time to grow, which means more estate tax savings at our death. For example, a $15,000 gift to a 10-year-old child by a 30–50-year-old parent has the potential, when invested, to become nearly $200,000 at the time of the giver’s death. That’s $20,000–$32,000 estate tax savings for an estate subject to Oregon estate tax, depending on tax bracket, plus a potential $80,000 of federal estate tax savings if also subject to federal estate tax. In 2021, a married couple could gift a combined total of $30,000 to each child, each year, completely gift and estate tax free. Over the years, this can really add up! Plus, if you don’t use an IDGIT, then by the time that child turns 18 and acquires full account access, it might not be the best idea to drop six figures on someone at such an early stage in life. Instead of gifting directly to a beneficiary, therefore, the grantor can create an IDGIT and make gifts to the IDGIT where use can be restricted and accountability provided and taught.
18 years old. The beneficiary can be his/her own trustee of an IDGIT at age 18. When this happens, it creates new conversations in the family about investing and money management. It’s a way to introduce a beneficiary to wealth and money management skills without allowing unlimited access to such wealth. The grantor can also include safeguard terms like the following:
(1) The grantor could remove the trustee at any time and for any reason.
(2) The trustee must provide the grantor monthly, quarterly, or yearly accountings showing how the assets were invested and used.
Additionally, some families restrict the beneficiary’s use of the IDGIT assets to the beneficiary’s education, at least while the beneficiary is under 25 years of age. When the child is involved in the management of funds for his or her own college, we’ve noticed that the child has a greater potential to view college as an investment. In recent years, families are talking together more about wealth and investment than ever before, and we’re seeing positive results. As a result, early family conversations about investing and money management are leading to adult children with financial acumen far beyond their years.
Adult children and generation-skipping trusts. For grantors with adult children who are already financially astute, the main reason an IDGIT is used is to take advantage of the generation-skipping tax exemption. For example, if the adult child already has an estate subject to estate tax, or the sums given to the child will cause such child to have a taxable estate, then the IDGIT can be drafted as a generation-skipping trust (GST). This means that the assets in the IDGIT will not be subject to estate tax at the death of the grantor and the assets of the GST will not be subject to estate tax at the death of the beneficiary. That’s some serious generational tax savings! The adult child can be a trustee of the IDGIT and use the assets in the IDGIT for his or her health, education, maintenance, and support (HEMS). The IDGIT can also be drafted to allow the adult child trustee to use the assets for his/her children’s HEMS.
At the end of the day, IDGITs are not just fiscally responsible, but they also provide more intangible benefits in that they foster dialogue between family members and other beneficiaries – creating a lifetime of conversations with loved ones in the process, not to mention more peace of mind for grantors when it comes to financial planning for the future – all while taking care of spouses, descendants, friends, and/or charities, and reducing tax liability for everyone involved. Give us a call to see if IDGITs are right for you.
Complimentary Estate Planning Seminars
The value of your home, life insurance, death benefits, and accounts are all included in your taxable estate. You can find out how estate tax planning could save your family thousands of dollars by joining our live webinars!
Join us at our next complimentary Introduction to Estate Planning Seminar. You’ll find a casual and comfortable atmosphere where you can learn and ask questions. With a lawyer, participants will:
• Address how wills and trusts work
• Understand the latest updates to the Oregon Estate Tax
• Discover how to reduce tax liability
• Ask any and all questions
Click on this link to register for an upcoming seminar soon! Don’t forget to invite your family!
Recent Comments from Myatt & Bell, P.C. Clients…
“Having our estate planning in place with you gives us peace of mind.” – Lynn, client
“Thanks for all of your help and work on my dad’s estate. I had no idea how involved the handling and probating of an estate is, but it was seamless with your help.” – Tom, client
A Little About Us…
Employee Profile of John Boylston
John Boylston, Vice President & Attorney
- What do you enjoy the most about estate planning? Learning about everyone’s families and seeing patterns and trends across families and age groups.
- What is your favorite sports team? Oregon Ducks and Portland Timbers
- What do you like to do for fun? Eat out at Portland’s amazing restaurants (when we were still allowed to do that).
John’s Favorite Family Recipe – Super Easy Creme Brûlée French Toast
- 4 eggs
- 3/4 cup of milk
- 2 tablespoons of light brown sugar
- granulated sugar
- 2 tablespoons of butter
- Mix the eggs, milk, and brown sugar.
- Heat the pan to medium and melt 1 tablespoon of butter in the pan.
- Submerge 3 slices of bread in the egg mix, poking the bread with a fork to help the egg soak into the bread. Flip the bread in the egg mix to ensure it is fully coated. Take the bread out allow the excess egg mix to come off. Sprinkle granulated sugar on one side. Place the bread sugar-side-down in the melted butter. Sprinkle sugar on the other side of the bread while it’s cooking. Flip when ready.
- Repeat steps 2 and 3 for the second batch of bread.
Be Part of our M&B Thank You Club!
(1) When you refer someone to us for their will, trust or tax needs, you get automatically inducted as a member into the M&B Thank You Club.(2) When you refer, you will receive benefits such as thank you gifts, inclusion in raffle drawings, and access to special opportunities and events, as our way of thanking you for trusting us with your family and friends.
(3) We will notify you of these opportunities mainly via email, but sometimes in other special ways. As such, make sure to add firstname.lastname@example.org email to your safe list and check your inbox for our “Thank You” emails, especially when you refer.