Benefits of Intentionally Defective Grantor Trusts

April 16, 2012 — 1,402 views  
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Some of the most advantageous methods for avoiding taxation and maximizing your financial holdings come from what are commonly referred to as loopholes. One of the most useful for estate planning purposes is related to intentionally defective grantor trusts, which basically shield inheritances from typical estate taxes in favor of exposing them to traditional income tax rates.

Grantor trusts were established by Sections 671 to 679 of the Internal Revenue Code and were essentially meant to guarantee certain kinds of financial holdings could be transferred in a certain way so as to keep them from being taxed as income. However, this had the effect of making it possible to set up a grantor trust that is intentionally defective and keeps estates from facing harsher estate taxes.

This is beneficial because money passed from one person to another in the event of a death is subject to much higher tax rates than standard yearly income. What's more, federal financial law forbids the giving of gifts before death to circumvent this process. However, the establishment of a grantor trust puts the money, financial instruments, corporate shares or property in a kind of escrow that can accumulate value that will only be taxed as income and can be transferred to another individual upon his or her death.