The intentionally defective grantor trust (IDGT) is a powerful tool that can achieve a wide variety of estate planning and asset protection objectives: transferring interests in a family business, qualifying for need-based programs such as VA benefits or Medicaid, transferring assets outside the probate process, or protecting assets from the claims of the grantor’s creditors.

To learn more about the ways you can achieve your own goals through an IDGT, contact the Law Offices of Spadea & Associates, LLC, in Ridley Park, and discuss your situation with an experienced trusts and estates attorney. Our firm’s understanding of the legal and practical considerations involved in IDGTs can significantly expand your options for future financial security while solving highly specific problems.

What Is an Intentionally Defective Grantor Trust?

Like any other trust, an intentionally defective grantor trust involves dividing the legal title to a given asset from the beneficial interest of owning it. A trustee administers trust assets in the interest of named beneficiaries. In a conventional trust, the tax, gift and probate consequences of trust ownership are substantially the same. In an IDGT, differences between federal tax treatment and the transfer’s status for probate purposes open the door toward significantly expanded flexibility for any number of estate planning objectives.

The central feature of an intentionally defective grantor trust is retention by the grantor of certain rights and interests in the trust assets. As a result, the grantor will need to pay taxes on income generated by trust assets, which is what makes an IDGT “defective” in the eyes of the IRS. A business owner can continue to operate business trust assets, and a homeowner can continue to exercise the powers of residence and ownership of real estate transferred into an IDGT.

When properly established, however, the asset transfers necessary to create an IDGT will be recognized as valid under state probate law. They will also be recognized as valid exercises of an estate reduction strategy for purposes of Veterans Administration programs and Medicaid eligibility. The specific uses of an IDGT for these purposes can include:

• Taking title to residential property for the sake of qualifying for Medicaid
• Protecting the proceeds of the sale of a primary residence during the lifetime of an applicant for VA pension benefits
• Preserving income tax exemptions for the proceeds of sale of a primary residence during the grantor’s life
• Taking the value of a primary residence out of VA Aid and Attendance benefits eligibility calculations
• Avoiding tax liability for asset appreciation during the grantor’s lifetime

Integrating an IDGT Into VA Benefits and Medicaid Eligibility Planning

There are many reasons to transfer assets into trust, including a preference to transfer them outside of probate, or to reduce the size of an estate for tax planning purposes. Transferring assets into an IDGT can also protect eligibility for such need-based programs as Medicaid or Veterans Aid and Attendance benefits.

For Medicaid planning, it is essential that assets be transferred out of the applicant’s estate at least five years before the time of need. Otherwise, the transfer will be disregarded for purposes of determining eligibility, and nonqualifying asset transfers can be recovered by the agency upon review after the grantor’s death.

For Veterans Administration programs, transferring assets into an IDGT will normally be effective to preserve or achieve eligibility for pension and other benefit programs, but VA benefits and Medicaid have somewhat differing eligibility rules that can complicate the situation for people who need to protect their ability to qualify under both systems. At Spadea & Associates, LLC, our attorneys work closely with each client in order to make sure that our estate planning solutions are carefully tailored to individual circumstances and goals.

Our familiarity with the legal and practical aspects of VA benefits eligibility planning can help ensure that the estate planning solution we recommend is well matched to the demands of your situation. Depending on your circumstances, the advantages of using an IDGT for protecting VA benefits can include: capital gains exemptions for the sale of the grantor’s home, deferred recognition of asset appreciation during the grantor’s life, disregard of assets for purposes of veteran’s pension qualification. In many cases, the important objective of protecting Medicaid eligibility can be advanced as well.

Not everyone will find it advisable to use an IDGT in connection with VA benefits eligibility planning. Because the grantor will continue to be liable for taxes on trust income, you will need to make sure you can afford tax payments. At the same time, excess income on trust assets could affect VA benefits eligibility.

Estate Planning Solutions in Philadelphia and Southeastern Pennsylvania

If an intentionally defective grantor trust can help you and your family, our lawyers can help you establish an IDGT on terms that take full account of your specific needs and goals across a wide variety of circumstances. For more information about the ways an IDGT can serve important estate planning or asset protection needs in your situation, including the need to protect access to income-tested government programs, contact Spadea & Associates, LLC in Ridley Park.