The Sale to an Intentionally Defective Grantor Trust (based on a true story)

Eric had a new business that was beginning to take off. Acting quickly to take advantage of a relatively low valuation, Eric sold his business to an intentionally defective grantor trust for its present value of $4,000,000. Eric remained the president of his business and continued to operate and control his business as if the sale had never occurred.

The sale of his business was not taxable, and not required to be reported on a tax return, because it was a sale to an intentionally defective grantor trust. Eric continued to operate the business under the ownership of the intentionally defective grantor trust without any change in his income taxes.

Eric and his wife were the primary beneficiaries of the trust, and their kids were the secondary beneficiaries. The distributions from the business were available to them at any time, but the ownership in the business was protected if any of them were ever sued or divorced. The trust would also ensure that, after the death of Eric and his wife, the kids would not get too much inheritance too soon or for the wrong purposes.

Seven years later, the business is worth $80,000,000. Because the business is owned by the intentionally defective grantor trust, it can be transferred to future generations without any gift, estate, or generation skipping taxes. This estate plan may save Eric’s family over $40,000,000 in estate taxes.

Does this sound too good to be true? It is not. A sale to an intentionally defective grantor trust is a well established estate planning strategy that can be implemented quickly and without too much cost or hassle.

Check out my website at LSM Law to see if this or another strategy is right for you.