Defective grantor trust is a really stupid name for something that, in the right circumstances, can be a very good idea. Somewhere along the line somebody realized that people might be disturbed by hearing that their trust was defective so the term became Intentionally Defective Grantor Trust. Kind of like – “Hey that defect in your trust. We put it there on purpose. So you should feel good.”
If you are an estate planning insider, then you understand the legal-speak, the acronyms, and maybe even the latest estate law jokes. On the other hand, if you are not, then you may get bogged down in some of the insider jargon and, well, find yourself downright confused. So it is with “defective” trust planning, as reported in a recent Forbes article titled “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.
In the end, you should know your tools and how to use them. Work with an open and inquisitive mind, and then work with competent counsel to examine your options.
Reference: Forbes (October 15, 2012) “Don't Freak Out If You Hear Your Trust Is Defective”