As you know if you’ve read the rest of the material on this website, the APS™ believes that NO estate or financial plan can be complete if they do not incorporate asset protection.

 

One of the most difficult assets to help our clients protect is their personal residence.  It is also usually one of the most valuable assets of many clients and therefore should be protected.

 

IDGTs

 

Most clients are not aware of the power of IDGTs when it comes to “advanced” estate and business transition planning.  Having said that, this discussion will focus not on a capital gains, income, estate, or gift tax play with an IDGT, but instead will focus on how to use an IDGT for “asset protection.”

 

To download the 63-page IDGT summary I offered in that newsletter, click on the following link: IDGT 63 Page PDF

 

We believe the best way to explain how to use an IDGT to protect the home is simply to give readers a flow chart for how to set up and use one.  For purposes of this discussion, you need to know that, as a general statement, an IDGT is a disregarded entity for tax purposes when the grantor is making the transfer to the trust.

 

The steps for using an IDGT to protect the personal residence.

 

1) The client’s attorney set up an IDGT (which is just an irrevocable grantor trust).

 

2) The client “sells” the residence to the IDGT for fair market value (FMV) in exchange for an “installment note.”

 

3) The client enters into a lease with the IDGT to live in the residence

 

4) The client pays rent to the IDGT (FMV rent)

 

5) The IDGT pays the client annual installment payments via the installment note

 

What happened?  The client sold the residence to the trust and entered into a lease with the trust to live in it.  The client pays X dollars to the trust as rent and the trust pays back to the client Y dollars via the installment note.

 

Frequently Asked Questions

 

-Is the rent deductible to the client?  No

 

-Is the rent income to the IDGT?  No

 

-Is the installment note payment to the client from the IDGT income to the client?  No.

 

-Can the note be accelerated?  Yes.  If the client ultimately would like the house sold, that can be accomplished in the IDGT and the proceeds can be paid to the client through an accelerated installment note payment.

 

-What happens if the property has a mortgage?  The IDGT would make the mortgage payments which would still be deductible to the client/grantor as if the house is owned individually.

 

Summary

 

This summary is not meant to give you a chapter and verse on how to use an IDGT to protect the value of a personal residence.  Instead, this is simply meant to make you aware of the fact that an IDGT can be used to protect the residence. Quality advisors pride themselves on knowing more than others on topics that are useful to clients.  We would submit to you that if you have advisors who are not familiar with this topic, then they are not able to give you the “best” advice when it comes to protecting your valuable assets.

 

If you would like to find someone in your local area who can help you protect your personal residence, please click here to find a locally “Rated” APS™  advisor.