Estate Planning · Haute Lawyer Network

What Is an IDGT (Intentionally Defective Grantor Trust)?

Last reviewed: November 2026 · Jurisdiction: United States (federal estate and gift tax; state rules vary)

Two envelopes labeled REVOCABLE TRUST and IRREVOCABLE TRUST beside a fountain pen on a wooden desk

An intentionally defective grantor trust (IDGT) is an irrevocable trust designed so that assets you transfer to it — and their future growth — are generally outside your taxable estate for federal estate and gift tax, while you remain the owner of the trust for federal income tax. The “defect” is intentional: the trust instrument includes a power that triggers the grantor trust rules in Internal Revenue Code §§671–679, so trust income is taxed on your Form 1040 even though the trust is complete for transfer-tax purposes. That mismatch is the point of the structure.

For 2026, the IRS sets the federal basic exclusion amount at $15,000,000 per person and the annual gift-tax exclusion at $19,000 per recipient (IRS, What’s new — estate and gift tax). An IDGT is one tool among others — see SLATs, GRATs, dynasty trusts and ILITs — and it is not right for every estate. State law and your facts control the details.

At a glance

Question	Short answer	Source
What is an IDGT?	An irrevocable trust that is complete for estate/gift tax but treated as a grantor trust for income tax	IRC §§671–679; planning practice
What does “defective” mean?	Defective for income tax only — the grantor still pays tax on trust income	IRC §671; IRS grantor-trust Q&A
Common income-tax trigger	Nonfiduciary power to substitute assets of equivalent value	IRC §675(4)(C); Rev. Rul. 2008-22
Does the swap power alone pull assets into the estate?	No, if trustee must ensure equivalent value and the power cannot shift benefits among beneficiaries	Rev. Rul. 2008-22
Who pays the income tax?	Usually the grantor; that payment is generally not an extra gift	Rev. Rul. 2004-64
Mandatory tax reimbursement?	Can cause estate inclusion under §2036(a)(1)	Rev. Rul. 2004-64
2026 federal basic exclusion	$15,000,000 per person	IRS What’s new — estate and gift tax
2026 annual exclusion	$19,000 per recipient	IRS What’s new — estate and gift tax
Can you undo it easily?	Generally no; it is irrevocable	Trust document / state law

What “intentionally defective” means

In ordinary English, “defective” sounds like a mistake. For an IDGT, the defect is deliberate and limited:

For estate and gift tax: the trust is irrevocable. When you make a completed gift (or a properly structured sale) to the trust, the transferred assets — and appreciation after the transfer — are generally outside your gross estate, provided you do not keep powers that pull them back under §§2036–2038.
For income tax: the trust is a grantor trust. Under §671, items of income, deduction and credit attributable to the portion you are treated as owning are reported on your return. The IRS explains that if an irrevocable trust meets any of the grantor-trust definitions in §§671, 673, 674, 675, 676 or 677, the grantor is treated as the owner and the trust is disregarded as a separate income-tax taxpayer for that portion.

So the trust is “defective” only in the sense that it fails to break the income-tax tie to you. That is how planners keep the estate-tax benefit of moving assets out while you continue to pay the trust’s income tax. Paying that tax from your own pocket can further reduce your taxable estate without, under Rev. Rul. 2004-64, being treated as an additional gift — because the tax is your legal liability under §671, not the trust’s.

For the broader grantor-trust concept, see What Is a Grantor Trust? and What Is an Irrevocable Trust?.

How the grantor trust rules create the income-tax defect

Drafters pick a power that triggers grantor-trust status for income tax without causing estate inclusion. The most commonly discussed trigger is the substitution (swap) power in §675(4)(C): a power, held in a nonfiduciary capacity, to reacquire trust corpus by substituting other property of equivalent value.

Rev. Rul. 2008-22 holds that this power will not, by itself, cause the trust corpus to be included in the grantor’s gross estate under §2036 or §2038 when:

the trustee has a fiduciary obligation (under local law or the instrument) to ensure the substituted and reacquired properties are in fact of equivalent value; and
the power cannot be exercised in a way that shifts benefits among the beneficiaries (for example, where the trustee can reinvest and owes a duty of impartiality, or where the trust’s distribution design makes income level irrelevant to relative shares).

Other administrative powers in §675 (such as certain borrowing powers) can also create grantor status. The wrong retained power — for example, a right to income or other enjoyment that §2036 reaches — can defeat the estate-tax goal. Choosing and drafting the trigger is counsel’s work, not a DIY checklist.

How IDGTs are typically funded (high level)

Two patterns show up often in published commentary and practice materials. This page stays conceptual — no sample discounts, note rates or claimed savings.

Completed gift to the trust. You transfer assets and use part of your lifetime gift/estate exemption (and, if relevant, GST exemption) for the gift. Future appreciation generally accrues outside your estate.
Installment sale to the trust. After a seed gift, you may sell assets to the IDGT in exchange for a promissory note. Because the trust is a grantor trust, Rev. Rul. 85-13 treats you and the trust as the same taxpayer for income-tax purposes, so the sale is generally disregarded for income tax (no recognized gain on the sale itself while grantor status holds). Transfer-tax results still depend on valuation, note terms and whether the sale is respected as a bona fide sale for adequate consideration. Hard-to-value assets (for example, closely held business interests) need careful appraisal and documentation.

Assets often discussed for these structures include interests in a closely held business and other assets expected to appreciate. Whether any particular asset fits — and how it should be valued — is a facts-and-adviser question.

IDGTs sometimes sit alongside other irrevocable designs. Compare What Is a GRAT?, What Is a SLAT?, What Is a Charitable Remainder Trust? and Can a Trust Reduce Estate Taxes?.

Why people use an IDGT

Families and business owners typically look at an IDGT when they want some combination of:

moving future appreciation out of a taxable estate while using exemption efficiently;
continuing to pay income tax on trust earnings so the trust can grow undiminished by that tax (the so-called tax burn), which Rev. Rul. 2004-64 treats as non-gift when the grantor is simply paying the grantor’s own liability;
retaining a carefully limited swap power that can later move low-basis assets back into the grantor’s hands (for a potential basis step-up at death) in exchange for high-basis assets of equal value — again, only if equivalent-value and fiduciary safeguards are real;
coordinating business-succession or closely held equity with multi-generational trusts, sometimes with dynasty trust features where state law allows.

None of that is automatic. Grantor status, completed-gift treatment and estate exclusion each depend on the document, the funding, and how the trust is administered.

Key risks and considerations

Cash-flow to pay the tax. You must be able to pay income tax on trust income from assets outside the trust. If that becomes burdensome, options are limited and must be drafted in advance.
Tax-reimbursement clauses. Under Rev. Rul. 2004-64, a mandatory right to be reimbursed by the trust for that income tax can cause the trust assets to be included in your estate under §2036(a)(1). A discretionary reimbursement power alone generally does not — but an understanding with the trustee, a power to name yourself as trustee, or local-law creditor exposure can still create problems.
Loss of grantor status. If the trust stops being a grantor trust (for example, the swap power is released), income tax shifts to the trust or beneficiaries, and pending installment-sale treatment can change. Turning the switch off is a planning event, not an afterthought.
Valuation and IRS scrutiny. Gifts and sales of hard-to-value assets invite appraisal and audit risk. Undervaluing a gift uses less exemption on paper than the IRS may later assert.
Irrevocability. You generally cannot take the assets back. Some states allow trust decanting, directed trusts or a trust protector, but those are separate design choices and are not a substitute for getting the IDGT right at creation.
Spousal and family rights. State elective-share and marital-property rules can affect what you can transfer. See, for Florida, Florida Elective Share.
It may not be needed. With a $15,000,000 federal basic exclusion for 2026, many estates will not owe federal estate tax. State estate taxes, business goals and family governance can still justify planning — or counsel may recommend a simpler path.

When to talk to counsel

Speak with an estate planning attorney (and usually a tax adviser) before creating or funding an IDGT if:

your estate may approach or exceed the federal exemption, or a state estate tax applies;
you hold closely held business interests or other hard-to-value assets;
you are considering a gift or installment sale to an irrevocable trust;
you need clarity on who pays income tax, whether reimbursement is allowed, and what happens if grantor status ends;
you are coordinating an IDGT with a SLAT, GRAT, ILIT, dynasty trust or charitable vehicle.

Questions worth bringing to the first meeting:

Which grantor-trust trigger fits my goals without causing estate inclusion?
Gift, sale, or both — and what appraisal process do we need?
How will I pay the income tax, and should reimbursement be forbidden, discretionary or (rarely) mandatory?
Who should serve as trustee, and do we want a directed-trust or protector design under state law?
How does this interact with my will, revocable trust, beneficiary designations and any prenuptial agreement?

Featured attorneys: Haute Lawyer Network members include Michael M. Marques, an estate planning attorney and founder of The Marques Law Firm, PLLC, focusing on estate planning, probate, tax and business law in Boston and New York, and Michael Kosnitzky, a tax and estate planning attorney and partner at Pillsbury Winthrop serving Miami and New York. Browse Estate Planning & Probate attorneys or Find a Lawyer. *Listed attorneys are paid members of the Haute Lawyer Network. Editorial selection, not a ranking.*

Related

Sources

26 U.S.C. §671, §675 (Cornell LII; accessed Nov. 6, 2026)
IRS, Rev. Rul. 2008-22, 2008-16 I.R.B. 796 (IRS IRB PDF; accessed Nov. 6, 2026)
IRS, Rev. Rul. 2004-64, 2004-27 I.R.B. 7 (IRS IRB PDF; accessed Nov. 6, 2026)
Rev. Rul. 85-13, 1985-1 C.B. 184 (sale/exchange between grantor and grantor trust disregarded for income tax; cited via secondary confirmation Nov. 6, 2026)
IRS, Abusive trust tax evasion schemes — Questions and answers (grantor-trust definition; accessed Nov. 6, 2026)
IRS, What’s new — Estate and gift tax (2026 basic exclusion $15,000,000; annual exclusion $19,000; accessed Nov. 6, 2026)
26 U.S.C. §2001(c) (top estate-tax rate 40%); 26 U.S.C. §2010(c)(3) as amended by Pub. L. 119-21 (basic exclusion $15,000,000 for 2026)

*This article is general information, not legal or tax advice. IDGT results depend on the trust document, funding, valuations, administration and changes in law; talk with a licensed estate planning attorney and tax adviser before creating or funding one.*

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