Why I need a IDGT to qualify for VA AID and Attendant Benefits

Estate plan
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.

Understanding “Intentionally Defective” Grantor Trusts

Despite its odd name, the intentionally defective grantor trust (IDGT) is a powerful estate planning tool that can achieve a wide range of objectives: reducing the size of the grantor’s estate, transferring assets outside the probate process, removing assets from the reach of the grantor’s creditors, and reducing the future tax liability upon transfer or sale of an appreciating asset. The IDGT can be an especially effective device for transferring small business ownership from one generation to another.

To create an IDGT, the grantor first sets up an irrevocable trust funded with cash or other liquid assets in an amount approximately 10 percent of the value of the other assets to be transferred into the trust. Once the IDGT comes into being, the grantor can then sell assets to the trust in exchange for promissory notes, which can either call for interest-only payments with a balloon or amortization of the principal amount of the debt.

Using the IDGT to Transfer Interests in a Closely Held Business

The most common IDGT sales transactions involve transfer of a non-controlling interest in a business owned solely or principally by the grantor, who retains certain rights in the assets transferred – mainly, the right to substitute trust assets or manage them on a non-fiduciary basis. This retention of rights with respect to trust assets is what makes the trust “defective” for income tax purposes. The grantor will need to pay tax on income produced by trust assets, because the IRS will regard the transfer of assets as a sale by the grantor to him or herself.

For estate and gift tax purposes, however, a properly created IDGT will be recognized as valid. Beneficiaries of the trust will take title to the assets free of income, capital gains or estate tax. Because asset values are determined at the time of the grantor’s transfer, subsequent appreciation of assets can be essentially tax-free when the beneficiaries come into title.

Accurate asset valuations are an indispensable part of making an intentionally defective grantor trust work. The installment note taken by the grantor at the time of sale to the trust should be based on current values. When the assets “sold” are interests in an LLC or S corporation, the values can generally be discounted to reflect the non-controlling nature of the interest and the lack of marketability.

Upon the grantor’s death, the grantor’s estate may be liable for tax on any unpaid balance of the installment note at the unappreciated asset value. Transferring an appreciating asset (interest in a closely-held business) in exchange for a non-appreciating asset (the installment note received upon sale) by itself is one of the ways that an IDGT helps families manage estate tax liability for the intergenerational transfer of business interests.

Ridley Park Trusts and Estates Lawyer: Call 610-521-0604

Metro Philadelphia estate planning attorney Gregory J. Spadea has advised many Pennsylvania business owners about their options for protecting asset values while reducing tax liability through the proper use of trust instruments, gift transfers and asset protection strategies. To find out whether the IDGT can help you meet your estate planning objectives, contact Spadea & Associates in Ridley Park. To learn more about the firm and its lawyers’ experience, visit its website at http://spadealawfirm.com.

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