In addition to thinking about using grantor retained annuity trusts (GRATs) for clients in the current atmosphere to help preserve wealth, the California Society of CPAs also suggests using intentionally defective grantor trusts (IDGT) and charitable lead trusts (CLT), both of which are irrevocable trusts. Under the first, the individual sells assets to the trust in return for an installment note, with interest calculated based on the current AFR. There is no gift tax because it is a “sale” of the assets, but because the grantor and the trust are considered the same taxpayer, no gain is recognized on the sale and the interest received under the note is not considered taxable income. The grantor would pay tax on the trust income, which in turn would further reduce the value of the estate. According to the CPAs, tax savings are achieved because, theoretically, the value of the assets leaving the estate from the sale will exceed the value returned by the note.
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