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What is a Defective Grantor Trust?

Posted by Mike C Posted on Feb 11 2014
The terms of an irrevocable trusts may include a substitution power that allows the settler the right to reacquire trust property by substituting property of equal value. A substitution power is frequently used by intentionally defective grantor trusts to cause the trust income to be taxed to the grantor of the trust, rather than the trust. The trust is defective (an incomplete transfer) for income tax purposes, but is effective (a complete transfer) for estate tax purposes so that the trust property is not included in the grantor's gross estate.