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The Use of Intentionally Defective Grantor Trusts Post ATRA

In view of the changes brought about by the American Taxpayer Relief Act of 2012, estate planning has taken on a new complexion. With the portability rules and the applicable estate tax exclusion of $5,250,000 (indexed for inflation) being made permanent, ATRA has not taken away the need for estate planning; rather, it has changed what CPAs now need to plan for. Most CPAs working in the area of estate planning are shifting focus to asset protection, enhanced generational transfers and portability. 

AICPA President and CEO Barry Melancon, CPA, CGMA, stated this video to AICPA members that the primary purpose of estate planning is to financially protect and provide for loved ones. This same sentiment was echoed by Jean-Luc Bourdon in a previous blog post, Tax Planning Complexity Can Provide Growth for Your Firm. The message is clear: CPAs need to shift from estate tax planning to estate planning.

The CPA may ask, “What kind of value can I offer my clients in the area of estate planning if it’s not tax planning?”

An estate planning strategy, which may provide great value for clients, is the asset protection trust. These are not trusts that are originated off shore nor are they under any IRS scrutiny. Rather, asset protection trusts are used every day by CPAs and attorneys. One variety of the asset protection trust is the Intentionally Defective Grantor Trust.

IDGTs are often used with life insurance. Even though the exclusion amount is $5,250,000, which in most cases eliminates the need for a trust for estate tax planning, the trust is still necessary for asset protection. The IDGT can be written to protect the life insurance proceeds from “predators and creditors.” Litigation and fraud are on the rise in society, thus making asset protection in estate planning even more critical.

An advantage of using an IDGT to hold life insurance, other than for asset protection, is that the traditional Irrevocable Life Insurance Trust is usually drafted to hold only a life insurance policy; whereas, the IDGT can hold many types of assets. In addition, most ILITs do not have Dynasty Trust provisions; therefore, the corpus is distributed to the beneficiaries at the death of the grantor and can become subject to predators and creditors. These Dynasty Trust provisions are found in most IDGTs.

There are still many opportunities for CPAs to bring value to their clients with estate planning. The IDGT is just one – albeit a powerful one. I encourage you to check out the many resources provided by the AICPA PFP Section such as webcasts and audio streams led by the profession’s leading experts, as well as The CPA’s Guide to Financial and Estate Planning.

Susan M. Tillery, CPA/PFS, President & CEO, Paraklete Financial, Inc. Susan serves on the AICPA Personal Financial Specialist Credential Committee and the Georgia Society of CPAs Personal Financial and Estate Planning Committee.

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