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Stop Paying Taxes - Intentionally Defective Grantor Trust (IDGT) - Aaron Skloff, AIF, CFA, MBA - CEO Skloff Financial Group
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Stop Paying Taxes - Intentionally Defective Grantor Trust (IDGT) - Aaron Skloff, AIF, CFA, MBA - CEO Skloff Financial Group

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Stop Paying Taxes - Intentionally Defective Grantor Trust (IDGT)


Skloff Financial Group
http://www.skloff.com/biography.htm

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  • 1. I Want You to Stop Paying Taxes Intentionally Defective Grantor Trust (IDGT) www.skloff.com
  • 2. Federal Estate Taxes Can Destroy Wealth Year Federal Exemption Federal Estate Tax Rate 2007 $2.0 million 45% 2008 $2.0 million 45% 2009 $3.5 million 45% 2010 Estate Tax Repealed 0% 2011 $1.0 million 55% www.skloff.com
  • 3. State Estate Taxes Can Destroy Wealth Top State Estate State State Exemption Tax Rate 2009 Connecticut $2.0 million 16% Delaware $3.5 million 16% Illinois $2.0 million 16% Kansas $1.0 million 3% Maine $1.0 million 16% Maryland $1.0 million 16% Maine $1.0 million 16% Minnesota $1.0 million 16% New Jersey $675,000 16% New York $1.0 million 16% www.skloff.com
  • 4. State Estate Taxes Can Destroy Wealth Top State Estate State State Exemption Tax Rate 2009 North Carolina $3.5 million 16% Ohio $338,333 7% Oklahoma $3.0 million 10% Oregon $1.0 million 16% Rhode Island $675,000 16% Tennessee $1.0 million 9.5% Vermont $2.0 million 16% Washington D.C. $1.0 million 16% Washington $2.0 million 19% www.skloff.com
  • 5. Understanding an Intentionally Defective Grantor Trust An Intentionally Defective Grantor Trust (IDGT) is an irrevocable trust created by a person (the “Grantor”), who gifts (“seeds”) assets (of at least 10% of the ultimate purchase price) to the trust, allowing the IDGT to then purchase the grantor’s assets in exchange for a promissory note with a specified term. www.skloff.com
  • 6. Understanding an Intentionally Defective Grantor Trust Oftentimes, the note will require interest only payments with a balloon payment of principal at the end of the term. The Grantor avoids gift taxes upon sale to the IDGT because the grantor and the trust are the same entity for income tax purposes. www.skloff.com
  • 7. Understanding an Intentionally Defective Grantor Trust Because the grantor ‘intentionally’ violates just enough of the Internal Revenue Code 671-679 control rules the assets are removed from the estate – thus the name Intentionally Defective Grantor Trust. At the end of the term the remaining assets of the IDGT are distributed to the named beneficiary (the “Remainderman”) or placed into a trust for the benefit of the beneficiary. www.skloff.com
  • 8. Understanding an Intentionally Defective Grantor Trust While the grantor is responsible for all income taxes generated by the IDGT, those same income tax payments provide another “tax free gift” because they retain the maximum value of the IDGT. Translation: the trust’s value does not decline due to tax payments. www.skloff.com
  • 9. Understanding an Intentionally Defective Grantor Trust The minimum interest rate on the promissory note is determined by the Internal Revenue Code 1274(d) Applicable Federal Rate (AFR), oftentimes called a “hurdle rate”. The November 2009 rate of 2.6% (for mid-term loans) is significantly lower than the 5.2% rate as recent as August of 2006, making the IDGT more appealing now than many periods over the last 10 years. www.skloff.com
  • 10. Understanding an Intentionally Defective Grantor Trust The primary reason for establishing an IDGT is to remove net profits from the estate, with net profits defined as any excess return above the hurdle rate. The lower the hurdle rate, the easier it is to remove more assets from your estate. Translation: it is easier to earn more than 2.6% than it is to earn more than 5.2%. www.skloff.com
  • 11. Example of Intentionally Defective Grantor Trust Grantor Gifts (“Seeds”) Assets to IDGT $ 300,000 Equal to 10% of Ultimate Purchase Price Grantor Sells Assets to IDGT in Exchange $3,000,000 for a Promissory Note with a 9 Year Term www.skloff.com
  • 12. Example of Intentionally Defective Grantor Trust Grantor Receives IRC 1274(d) AFR of $ 702,000 2.6% Each Year for 9 Years Grantor’s Assets Returned $3,000,000 But… www.skloff.com
  • 13. Example of Intentionally Defective Grantor Trust Over the 9 Years, Assets Grew to $6,000,000 After Grantor’s Original Asset Returned ($3,000,000) Remainderman Receives Balance $3,000,000 And… Grantor Removes Same Amount from Estate $3,000,000 Plus Any Income Taxes Paid www.skloff.com
  • 14. Conclusions Federal and state estate taxes can destroy wealth. IDGTs remove net profits from the estate. Establishing an IDGT with a low hurdle rate increases the likelihood of removing a larger amount of assets from your estate – potentially eliminating your federal and state estate tax obligations. www.skloff.com
  • 15. Aaron Skloff, AIF, CFA, MBA Chief Executive Officer Skloff Financial Group 908.464.3060 www.skloff.com