# Intentionally Defective Grantor Trust (IDGT): Definition and How It Works in California

> An intentionally defective grantor trust (IDGT) is an irrevocable trust kept out of its creator's taxable estate while the creator still pays its income tax.

Source: https://ridleylawoffices.com/estate-planning-glossary-california/intentionally-defective-grantor-trust/

By Eric Ridley, attorney, Ridley Law. Updated October 2026.

An **intentionally defective grantor trust** (IDGT) is an irrevocable trust kept out of its creator’s taxable estate while the creator still pays its income tax. The “defect” is deliberate, a power written into the trust that makes it a grantor trust for income tax purposes only.

## How it works in California

Ridley Law’s [guide to the sale to an IDGT](https://ridleylawoffices.com/intentionally-defective-grantor-trust-idgt/) covers the full transaction. The income tax side runs on the federal grantor trust rules that begin at [26 U.S.C. § 671](https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section671&num=0&edition=prelim). A common trigger is a power, held outside any fiduciary role, to reacquire trust assets by substituting other property of equal value ([26 U.S.C. § 675(4)(C)](https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section675&num=0&edition=prelim)), usually called a swap power. The gift into the trust is complete, so the assets aren’t in the creator’s estate, but the trust’s income is reported on the creator’s own return. California follows the federal trust income tax rules unless its code says otherwise ([Rev. & Tax. Code, § 17731](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=17731)), so the creator pays the California tax on that income too.

The classic use is a sale. The creator sells an asset, often a minority interest in a family company, to the trust for a promissory note. Because a grantor is treated as owning a grantor trust’s assets for income tax purposes, the IRS doesn’t recognize the exchange of a note for trust assets as a sale, as [Rev. Rul. 2007-13](https://www.irs.gov/irb/2007-11_IRB) explains when it describes the earlier Rev. Rul. 85-13.

## Why it matters

Every dollar of income tax the creator pays on the trust’s income is a dollar that stays in the trust for the children, and it isn’t a gift. [Rev. Rul. 2004-64](https://www.irs.gov/irb/2004-27_IRB) holds that when a grantor pays the income tax on grantor trust income, the grantor isn’t treated as making a gift to the beneficiaries. Over ten or twenty years that tax payment can move as much value as the original gift.

## Common mistakes

Expecting a step-up in basis at death. Assets in a completed-gift grantor trust that aren’t in the creator’s estate keep the creator’s basis ([Rev. Rul. 2023-2](https://www.irs.gov/pub/irs-drop/rr-23-02.pdf)), so heirs can face a large capital gain on a later sale. Pricing a sale off a weak appraisal, which leaves any extra value exposed as a gift. A defined value clause is the usual guard. And forgetting that the creator owes the tax on the trust’s income every year, whether or not the trust pays anything out.

## Related terms

- [Grantor Retained Annuity Trust (GRAT)](https://ridleylawoffices.com/estate-planning-glossary-california/grantor-retained-annuity-trust/): another estate freeze that moves growth to family, using an annuity instead of a note.
- [Spousal Lifetime Access Trust (SLAT)](https://ridleylawoffices.com/estate-planning-glossary-california/spousal-lifetime-access-trust/): a SLAT is usually drafted as a grantor trust, so the same income tax rules apply.
- [Defined Value Clause](https://ridleylawoffices.com/estate-planning-glossary-california/defined-value-clause/): the formula that keeps an IDGT sale from turning into a surprise gift after an audit.
- [Family Limited Partnership (FLP)](https://ridleylawoffices.com/estate-planning-glossary-california/family-limited-partnership/): minority partnership interests are a common asset sold to an IDGT.
- [Incomplete Gift Nongrantor Trust (ING Trust)](https://ridleylawoffices.com/estate-planning-glossary-california/incomplete-gift-nongrantor-trust/): the opposite design: a nongrantor trust whose transfer isn’t a completed gift.
- [Grantor Trust](https://ridleylawoffices.com/estate-planning-glossary-california/grantor-trust/): the general income tax category an IDGT is drafted to fall into.

Part of the [California estate planning glossary](https://ridleylawoffices.com/estate-planning-glossary-california/). For the full treatment, see [Intentionally Defective Grantor Trust (IDGT): How a Sale to a Grantor Trust Works in California](https://ridleylawoffices.com/intentionally-defective-grantor-trust-idgt/).