The transfer of a residence to an IDGT is a strategy that enables a wealthy family to remove a valuable asset from their estate without impinging upon liquidity. It is built upon using time-tested estate planning concepts that are very likely to remain through year-end. When coupled with a soft real estate market, I don’t believe I’m exaggerating when I say that this could prove to be one of the smartest estate planning moves one will ever make.
The current laws and economics surrounding wealth transfers are just too good to give up. This is especially true with the 2013 tax cliff rapidly approaching and little political agreement to be found for future laws.
When it comes to transferring real estate, you have many options. However, one you ought to investigate is the Intentionally Defective Grantor Trust (IDGT).
The ins and outs of the venerable IDGT was explored recently in a Forbes article titled “Reduce Estate Taxes Without Reducing Your Liquidity.” It’s better not to wade too deeply into what makes an IDGT “intentionally defective,” except to say it creates a unique tax situation. Moving the real estate (perhaps your personal residence) into the IDGT will count as a gift in the year you make the transfer, even though you’ll still be living in the house. Effectively, you are setting up your own trust as a landlord, and yourself as tenant, complete with rent payments into your own trust. Properly done, in the process you will enjoy a great number of tax advantages.
Employing an IDGT to transfer the family home may be a perfect technique to maximize your wealth transfers, particularly in a soft real estate market with an uncertain estate and gift tax future.
Reference: Forbes (September 4, 2012) “Reduce Estate Taxes Without Reducing Your Liquidity”