An intentionally defective grantor trust (IDGT) is one of the most effective tools for high-net-worth clients who want to move a growing asset out of their estate. It’s also a natural home for life insurance.
Key takeaways
- An IDGT is outside the grantor’s estate for estate tax purposes but treated as the grantor for income tax purposes.
- Because the grantor and trust are the same taxpayer, selling appreciated assets to the trust for a note generally triggers no capital gain, and note interest isn’t taxable income.
- Life insurance can be transferred to a grantor trust without triggering the transfer-for-value rule, and can fund liquidity or repay the note.
Sell a growing asset to the trust for a note, and future appreciation above the note’s interest rate passes to heirs outside the estate.
Why the “defect” is intentional
Grantor trust rules were originally written to stop income shifting, when trusts were taxed at lower rates than individuals. Today trust tax brackets are highly compressed, so paying the trust’s taxes personally is usually preferable. Trusts are therefore deliberately drafted to be grantor trusts for income tax while remaining outside the estate. Proposals in 2021 to curb grantor trusts were not enacted.
How an installment sale works
- The grantor makes a “seed” gift to the trust, often around 10% of the value of the asset to be sold.
- The grantor sells an appreciating asset, such as business interests, to the trust for a promissory note at the IRS’s applicable federal rate.
- Because the grantor and trust are one taxpayer, the sale generally doesn’t trigger capital gain, and interest payments aren’t taxable income to the grantor.
- Growth above the note’s interest rate stays in the trust, outside the estate.
Where life insurance fits
- Ownership: the trust can own life insurance on the grantor, keeping the death benefit outside the estate.
- Transfer-for-value: transferring an existing policy to a grantor trust is generally treated as a transfer to the insured, an exception to the transfer-for-value rule. See how transfer-for-value can hurt a death benefit.
- Liquidity: the death benefit can repay any outstanding note or provide cash for estate taxes.
Planning notes
Assets in the trust don’t receive a step-up in basis at the grantor’s death. The strategy requires careful drafting, a qualified appraisal, and ongoing administration, so it should always be designed with the client’s attorney and tax advisor. We can help model the life insurance piece. More on how grantor trusts work.
Frequently asked questions
What is an intentionally defective grantor trust?
An irrevocable trust drafted so its assets are outside the grantor’s estate, while the grantor is still treated as owner for income tax purposes.
Does selling assets to an IDGT trigger capital gains tax?
Generally no, because the grantor and the trust are treated as the same taxpayer for income tax purposes.
Can a life insurance policy be moved into a grantor trust?
Yes. A transfer to a grantor trust is generally treated as a transfer to the insured, an exception to the transfer-for-value rule.
Reviewed by Tim Fuller on 2026-09-25
Tim Fuller
President, SRS Inc.
Tim leads SRS Inc., a full-service IMO (Independent Marketing Organization) and BGA (Brokerage General Agency), connecting independent financial professionals with life, annuity, disability income, and long-term care solutions from 60+ carrier partners.
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