Intentionally Defective Grantor Trust IDGT DC
Plan Today for Future Wealth
An intentionally defective grantor trust (IDGT) is an advanced estate planning structure that removes assets from a taxable estate while allowing them to grow without being reduced by trust-level income taxes. The grantor continues to pay income tax on trust earnings out of their own pocket, which is both the key feature and the key planning benefit. Washington, DC, residents face both federal and DC estate tax, which makes this structure particularly relevant for estates above the DC exclusion threshold.
How an Intentionally Defective Grantor Trust Works in DC
The IDGT works by deliberately creating a gap in how the IRS treats the trust for income tax purposes versus estate tax purposes. For estate tax, the assets transferred into the trust are outside the grantor’s taxable estate. For income tax, the grantor is still treated as the owner of those assets.
That distinction produces two planning benefits. First, the trust assets grow without being reduced by income taxes paid at the trust level. The grantor pays those taxes personally, which reduces the grantor’s own estate further without triggering gift tax. Second, each tax payment the grantor makes on behalf of the trust is effectively a tax-free transfer of additional wealth to the trust beneficiaries.
Washington, DC imposes its own estate tax separate from the federal estate tax. For 2026, the DC estate tax exclusion amount is $4,988,400, significantly lower than the federal basic exclusion amount of $15 million. That gap means many DC estates that fall below the federal threshold still owe DC estate tax. The IDGT addresses both layers of exposure simultaneously.
Kevin C. Martin, Attorney at Law, PLLC, works with DC residents to evaluate whether an IDGT fits their estate planning goals and how to structure one correctly under both federal and DC tax rules.
The trust is irrevocable once created. Assets transferred in cannot be reclaimed. That permanence is what makes the estate tax benefit work, and it is also why careful planning before the trust is funded matters significantly.
Key Features of an IDGT and What Makes It Useful
Several specific features determine whether an IDGT delivers the intended planning results. Understanding each one is necessary before deciding whether this structure fits a particular estate.
The Intentional Defect
The word defective refers to a specific tax treatment gap built into the trust on purpose. The IRS treats the grantor as the income tax owner under Internal Revenue Code sections 671 through 677, while the assets remain outside the grantor’s estate for estate tax purposes.
This is not a flaw. It is the structure’s core design. The defect is created by including specific provisions in the trust document that retain limited powers in the grantor without crossing the line into estate tax inclusion.
The Seed Gift
Most IDGTs are funded with an initial contribution, commonly called a seed gift, to give the trust economic substance before other transactions are layered on top. There is no fixed IRS requirement that this seed gift equal a specific percentage of the trust’s total value.
The appropriate amount depends on the structure, the assets involved, and how the trust will be used. An attorney familiar with IDGT planning can help determine what initial funding makes sense for a particular situation.
Installment Sale to the IDGT
A common technique used alongside an IDGT is a sale of appreciated assets to the trust in exchange for a promissory note. Because the grantor is treated as the tax owner of the trust, the sale does not generate capital gains. Future growth on those assets stays inside the trust and out of the grantor’s estate.
The promissory note must bear at least the applicable federal rate (AFR) set by the IRS. Using the correct rate is important, but it does not by itself guarantee that the transaction has no gift tax consequences. The sale must be properly structured, and the assets must be appropriately valued. Errors in valuation or structure can expose the transaction to challenge.
Ongoing Income Tax Obligation
The grantor pays income tax on all trust earnings each year, reported on the grantor’s personal return. The trust itself pays no separate income tax on those earnings.
This ongoing tax obligation is a planning feature rather than a burden. Each payment reduces the grantor’s estate without triggering gift tax, effectively transferring additional value to the trust beneficiaries over time.
When an IDGT Makes Sense for a DC Estate Plan
An IDGT is not the right tool for every estate plan. Several circumstances make it particularly useful, and several others suggest a different approach would work better.
Estates Above the DC Exemption
The DC estate tax exclusion for 2026 is $4,988,400. Estates above that threshold face DC estate tax in addition to any federal exposure. An IDGT reduces the taxable estate by removing assets and their future growth, which can meaningfully reduce or eliminate DC estate tax liability depending on the size of the estate and the assets involved.
Closely Held Business Interests and Appreciated Assets
Assets that are expected to grow significantly over time produce the strongest results inside an IDGT. A closely held business interest, investment portfolio, or real property with substantial appreciation potential transferred today locks in a lower value for gift and estate tax purposes. All future growth belongs to the trust and the beneficiaries.
A right-of-first-refusal arrangement or valuation discount may further reduce the taxable value of business interests transferred into the trust, depending on the specific facts and applicable tax law.
Grantor’s Ability to Pay Ongoing Income Tax
Before setting up an IDGT, the grantor needs to realistically assess whether they can sustain the ongoing income tax obligation. The trust’s earnings are taxed to the grantor personally each year.
If the trust holds income-producing assets, that obligation can be substantial. An IDGT works best when the grantor has sufficient liquidity outside the trust to cover those taxes without financial strain.
Long Planning Horizon
IDGTs produce the greatest benefit over longer time periods. The compounding effect of tax-free growth inside the trust, combined with the ongoing estate reduction from the grantor’s income tax payments, accumulates over years and decades.
For estates where the primary goal is transferring wealth to the next generation in the near term, other structures may be more appropriate.
Setting Up an IDGT in Washington, DC Step by Step
The IDGT setup process follows a defined sequence. Each stage needs to be completed correctly for the structure to produce the intended tax results.
Planning Review
The process starts with a review of your assets, your estate tax exposure under both federal and DC rules, and your goals for the trust. This assessment determines whether an IDGT is the right structure and what assets are best suited for transfer.
This stage typically takes one to two meetings with an estate planning attorney and may involve review of business valuations, financial statements, or existing estate planning documents.
Trust Drafting
The attorney drafts the trust document. The document must include the specific provisions that create the income tax defect while keeping the assets outside the estate for estate tax purposes. Getting this drafting right is critical because the defect must be intentional and precise.
The trust names the grantor, the trustee, and the beneficiaries, and sets the terms for how trust assets are managed and distributed. DC law does not generally require notarization for trust creation, but the trust must satisfy the applicable requirements for creation and be properly executed according to its terms.
Funding the Trust
An unfunded trust accomplishes nothing. After the trust is signed, assets must actually be transferred into it. This may involve retitling real property, assigning business interests, or transferring financial accounts into the trust’s name.
The initial seed gift and any subsequent installment sale must be properly structured and documented. The assets being transferred should be appropriately valued, particularly when business interests or other hard-to-value assets are involved.
Ongoing Administration
After the trust is funded, the grantor reports trust income on their personal return each year. The trustee manages trust assets, follows the trust terms, and maintains records. The ongoing income tax treatment must be maintained carefully to preserve the IDGT structure’s intended benefits.
DC residents should also account for DC estate and income tax rules in the ongoing administration of the trust, since DC’s rules differ from federal rules in several respects.
Considering an IDGT for Your DC Estate Plan?
An intentionally defective grantor trust can be a powerful tool for DC residents whose estates exceed the DC exclusion threshold of $4,988,400 or who hold appreciated assets they want to transfer efficiently to the next generation.
The structure requires precise drafting, appropriate asset valuation, and ongoing administration to produce the intended tax results. Errors in any of those areas can expose the trust to challenge or produce unintended tax consequences.
Contact us to discuss your situation and determine whether this strategy makes sense for your estate.
Frequently Asked Questions About IDGTs in Washington, DC
Can an IDGT be undone after it is created?
No. An IDGT is irrevocable once signed. The grantor cannot reclaim assets transferred into the trust. That permanence is what makes the estate tax benefit work, which is why careful evaluation before funding the trust matters significantly.
Who pays income tax on an IDGT in DC?
The grantor pays income tax on all trust earnings each year, reported on the grantor's personal return. The trust pays no separate income tax on those earnings. This arrangement benefits the trust beneficiaries because the trust assets grow without being reduced by income taxes, while the grantor's estate is reduced by each tax payment made.
What types of assets work best inside an IDGT?
Assets expected to appreciate significantly over time produce the strongest results. Closely held business interests, investment portfolios, and real property with growth potential are common choices. Transferring them into an IDGT early locks in a lower value for gift and estate tax purposes and keeps all future appreciation inside the trust.
Does an IDGT avoid probate in DC?
Yes. Assets held in the trust pass directly to beneficiaries under the trust terms without going through DC probate. This keeps the transfer private and avoids the time and cost of the DC Superior Court probate process.
Is an installment sale to an IDGT the same as a gift?
No. An installment sale is a structured transaction in which the grantor receives a promissory note from the trust in exchange for transferred assets. Because the grantor is the deemed income tax owner of the trust, the sale does not generate capital gains. The transaction is not a gift, but it must be properly structured, and the assets must be appropriately valued to avoid unintended gift tax consequences.