Intentionally Defective Grantor Trust - IDGT

Sounds like a kind of scam. Like your little brother purposely breaking dishes when it was his turn to clean up after dinner, so that your parents would never ask him to wash dishes ever again. Intentionally Defective Dish Washer.

An IDGT is a legitimate estate planning strategy meant to avoid paying taxes on property handed down as an inheritance. It's a legitimate move, taking advantage of a loophole. The "defect" in the trust allows the assets in the trust to get taxed as income, rather than forcing beneficiaries (the heirs in most cases) to pay a gift tax.

You set up a trust, with assets included that you want to leave to your heirs. But the structure is set up with the "intentional defect." As a result, the trust is not airtight...it's a little leaky, like a defective boat. Because of this, you need to pay income taxes on the assets inside the trust. However, later on, the fact that you paid income taxes means that other taxes (like a gift tax) aren't owed on the assets.