Freezing Estate Value: How IDGTs Move Growth to the Next Generation Tax-Free
Written by Ryan Anderson, Sr. Partner and Private Wealth Advisor, and Mike Bleck, Partner and Sr. Estate Planning Advisor An Intentionally Defective Grantor Trust (IDGT) is one of the most effective ways to move appreciating assets out of your estate without triggering immediate gift tax. The “defective” part refers to income tax; the IRS treats you as the owner for income tax purposes, but not for estate tax.
Written by Ryan Anderson, Sr. Partner and Private Wealth Advisor, and Mike Bleck, Partner and Sr. Estate Planning Advisor
An Intentionally Defective Grantor Trust (IDGT) is one of the most effective ways to move appreciating assets out of your estate without triggering immediate gift tax. The “defective” part refers to income tax; the IRS treats you as the owner for income tax purposes, but not for estate tax.
In the $30M exemption era, IDGTs allow you to:
- Lock in today’s asset values.
- Transfer all future appreciation to heirs tax-free.
- Pay the trust’s income taxes yourself, effectively making additional tax-free gifts.
How It Works
- Seed Gift. You make an initial gift to the IDGT (often 10% of planned sale value).
- Sale to the IDGT. You sell appreciating assets (e.g., FLP units, business interests, real estate) to the trust in exchange for a promissory note at the IRS Applicable Federal Rate (AFR).
- Asset Growth vs. AFR. Any appreciation above the AFR accrues to the trust, outside your estate.
Why It’s Powerful Now
- AFR rates remain relatively low historically—easy for well-chosen assets to outperform.
- No capital gain recognized on the sale because you and the trust are the same taxpayer.
- Paying the trust’s income tax further reduces your estate and increases trust growth.
Example
Sell $10M in FLP interests to an IDGT at a 3% AFR over 10 years:
- Assets grow at 8% annually.
- After note repayment, ~$11M in growth remains in the trust — estate and gift tax-free.
Considerations
- Must survive the note term for maximum benefit.
- Asset growth must exceed AFR for strategy to be worthwhile.
- Requires legitimate seed gift and proper valuation support.
Up Next: How Family Limited Partnerships (FLPs) can reduce taxable value and centralize management.
Ryan Anderson is a private wealth advisor and senior partner in Blue Trust’s Private Wealth division, serving clients in Houston and Dallas. Ryan works with individuals, families, foundations, and business owners on financial planning, charitable giving strategies, and long-term wealth stewardship, with particular experience advising physicians, entrepreneurs, and energy industry professionals.
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