Unusual Trusts Gain Appeal in Unusual Time

Posted by: Liwin Troy Lee

By: Mike Spector and Anne Tergesen

It may seem hard to come up with a financial product with a name as unattractive as an "intentionally defective grantor trust." Yet these days, in the world of estate planning, those words denote one sexy vehicle.

That's because this aggressive strategy -- which can be used to move money out of taxable estates and transfer gains to heirs tax-free -- is especially appealing at a time like now, when asset values have fallen sharply and interest rates are near historic lows.

Many estate planners warn that these trusts carry more risks than other accepted planning vehicles. The Internal Revenue Service hasn't blessed defective grantor trusts, and has challenged their authenticity in the past. What's more, if your assets perform poorly in this type of trust, you could get hit with greater losses than you would suffer with some other popular wealth-transfer techniques.

Still, most defective grantor trusts have withstood IRS scrutiny, and many estate-planning lawyers report seeing increased interest in them this year, in the wake of the tumble in the real-estate and stock markets. Neil Kawashima, a partner at McDermott Will & Emery LLP, says he expects he'll increase the number of these transactions he executes this year by nearly a third. Carl Waldman, an estate-planning attorney in Westlake Village, Calif., says he has set up about 25 of these trusts in the past 12 months, versus "probably no more than six" in the prior year.

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