Clients who own concentrated stock and are wary of diversification may be more open to giving their assets to loved ones or charities, according to Tim Kochis. In his book “Managing Concentrated Stock Wealth,” he says clients can create an intentionally defective grantor trust to pass stock onto their beneficiaries, but retain income tax liabilities for themselves.
“A transfer of property can be final and irrevocable in terms of ownership (thus removing an asset — and all its growth potential — from your client’s estate) while the income tax liabilities of the property remain with the original owner.”
Tax rules outline provisions that would make a trust defective. A defective trust doesn’t meet the criteria for transfer tax rules, turning tax liabilities back to the donor rather than the investor.