In software terms the “defect” is a feature, not a bug. The 'Intentionally Defective Trust" will have but one defect and that is in a power held by the grantor or the fiduciary that produces an income tax effect that can be desirable.
If you are not schooled in estate planning or up to speed on the latest estate law jokes, you may be scratching your head when it comes to so-called “defective” trust planning. Did you say “defective” trusts? Why yes, yes I did. And as a recent Forbes article says, “Don't Freak Out If You Hear Your Trust Is Defective.”
The defective grantor trust, and more specifically the Intentionally Defective Grantor Trust (IDGT), is more often than not the source of confusion estate planning greenhorns face. That’s unfortunate. Why? Because so-called “defective” trusts usually work pretty well, and they work well precisely because they are defective.
Here’s the rub: sometimes you want your trust to be a trust and sometimes you don’t, and a defective trust only fails when you want it to. The heart of the matter, defective or otherwise, is simply to say that there is a lot to learn about this weird intersection between your life, unique legal entities, and weird tax laws that we call estate planning.
As with any sort of end-of-life planning, you should know your tools and how to use them. When a tool such as the “defective” trust leaves you scratching your head in confusion, seek competent counsel to examine your options.
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Reference: Forbes (October 15, 2012) “Don't Freak Out If You Hear Your Trust Is Defective”