IDGT Installment Sale Calculator — Intentionally Defective Grantor Trust

An IDGT installment sale is one of the most powerful wealth transfer strategies available to HNW families. You sell an appreciating asset to an irrevocable trust in exchange for a promissory note at the low AFR rate. All appreciation above that rate accumulates in trust for your heirs — free of estate and gift tax — while the sale itself triggers zero capital gains.

IDGT installment sale calculator

Enter the asset value being sold to the trust, the note term, and expected growth rate. The calculator shows annual note payments, the year-by-year trust schedule, and the wealth transferred to your heirs outside your taxable estate.

How an IDGT installment sale works — step by step

1. Set up the trust. Your attorney drafts an irrevocable grantor trust. It's irrevocable for estate/gift tax purposes (the assets leave your estate) but a "grantor trust" for income tax purposes — which means you pay the income tax on all trust income, and the IRS treats you and the trust as the same entity for income tax purposes.
2. Make the seed gift. You transfer a cash gift to the trust — typically 10% of the intended sale price. This establishes the trust's economic substance. The seed gift uses your lifetime exemption ($15M/individual under OBBBA, permanent). On a $10M sale, a $1M seed gift uses 1/15th of your exemption.
3. Sell the asset to the trust. You sell the appreciating asset (business interest, real estate, concentrated stock) to the trust in exchange for a promissory note equal to the asset's fair market value. The note bears interest at the AFR — currently 3.82% (short-term), 4.08% (mid-term), or 4.83% (long-term) for May 2026. Because you're selling to your own grantor trust, this is not a taxable event — no capital gains recognized (Rev. Rul. 85-13).
4. Trust holds and grows the asset. The trust pays you annual interest on the note. At maturity, it repays the principal. Every dollar the asset grows above the AFR rate accumulates in the trust for your heirs — completely outside your taxable estate.
5. Note matures; trust value stays outside the estate. When the note is paid off, the trust is free and clear. The accumulated appreciation above the AFR never passes back to you and is never subject to estate tax. Your heirs receive it outright (or it continues in trust for additional generations, avoiding estate tax again).

Why the sale triggers zero capital gains

This is the feature that distinguishes an IDGT installment sale from any other sale of appreciated property. Revenue Ruling 85-13 established that a transaction between a grantor and their grantor trust is disregarded for income tax purposes — the grantor and the trust are treated as the same taxpayer. Selling appreciated stock to your grantor trust is like selling stock to yourself: no gain is realized, no capital gains recognized.

This means you can sell a business interest with a $100K cost basis worth $10M, receive a $10M promissory note, and owe zero capital gains on the transfer. The trust holds the asset with the original cost basis — but because the trust will typically hold for decades (or until the grantor dies, at which point a step-up may apply to certain assets), the deferred gain is less consequential than the estate tax avoided.

The income tax benefit: grantor pays the trust's taxes

Because the IDGT is a grantor trust, you — the grantor — pay income tax on all of the trust's income. The trust itself pays no income tax. This might seem like a burden, but estate planners treat it as an additional wealth transfer benefit:

• You deplete your taxable estate by the income taxes you pay on the trust's behalf.
• The trust grows without any income tax drag — compounding at the full pre-tax rate.
• The IRS does not treat the grantor's payment of income taxes on the trust as a taxable gift (Rev. Rul. 2004-64).

Example: If the trust holds a $10M business interest earning $400K/year in ordinary income (4%), the grantor pays ~$148,000/year in income taxes (37% federal rate) on the trust's behalf. Over 9 years, that's ~$1.3M transferred from the grantor's estate to the trust completely tax-free — on top of the IDGT installment sale mechanism itself.

The seed gift requirement: why 10%?

The IRS can challenge an IDGT installment sale if the trust lacks "economic substance" — i.e., it's nothing but a note-funded shell. To establish that the trust has independent economic significance, practitioners universally recommend seeding the trust with a cash gift before the sale. The 10% rule of thumb comes from Tax Court cases and practitioner consensus: a trust whose only "asset" is a receivable from the grantor looks like a conduit rather than a real trust. Seeding with 10% of the sale price addresses this.

The seed gift is a taxable gift (uses your $15M lifetime exemption). A $1M seed on a $10M sale uses $1M of your $15M exemption — a reasonable cost to transfer $10M of future appreciation outside the estate at the AFR rate.

Best assets for IDGT installment sales

• Closely-held business interests. Privately valued businesses often qualify for minority interest and lack-of-marketability discounts (20–35% combined), meaning you can sell a $10M FMV interest to the trust for $7M after discounts — locking in a lower note while all appreciation above $7M accrues to heirs. See FLP/family LLC guide for the valuation discount mechanics.
• Pre-liquidity equity. Stock in a company expected to 3–10× on an IPO or acquisition. If the asset goes from $10M to $50M during the note term, the $40M of appreciation all passes to heirs. No capital gains on the original transfer; no estate tax on the appreciation.
• Investment real estate. Appreciated rental or commercial property with expected above-AFR appreciation. Note: the trust will need to generate enough cash flow (rents) to pay annual interest on the note.
• Concentrated stock positions. Large employer stock with a low cost basis. The no-capital-gains feature of the IDGT sale is especially valuable when the basis is near zero.

IDGTs work least well for low-growth assets (the AFR hurdle is easy to clear, but there's little excess appreciation to transfer), dividend-heavy assets that distribute more than they grow, or any asset where the grantor's imminent death would trigger the note and cause estate liquidity issues.

IDGT vs GRAT vs SLAT — which strategy fits?

Many HNW estate plans combine all three: a SLAT funded with diversified assets to use exemption efficiently, rolling 2-year GRATs on the concentrated stock position to capture spikes in appreciation without using exemption, and an IDGT installment sale for the business interest or pre-IPO position that exceeds the remaining exemption.

Risks and considerations

• IRC §2036 estate inclusion. If the IRS determines the grantor retained control over the trust (e.g., receives distributions from the trust indirectly, or the trust is structured to benefit the grantor), the full trust value could be pulled back into the taxable estate. Proper drafting — the trust must have independent trustees and real economic substance — is essential. The sale structure (vs. a retained-interest gift) makes §2036 challenges harder for the IRS to win compared to GRATs.
• Mortality risk and note at estate. Unlike a GRAT, death during the note term doesn't kill the strategy. The trust appreciation remains outside the estate. But the outstanding note balance is included in the estate at face value. If the grantor dies with a $10M note outstanding, the estate includes $10M. Estate liquidity planning is important.
• Asset underperformance. If the asset grows less than the AFR rate, little or no excess wealth transfers. Unlike a GRAT, the note must still be repaid — potentially requiring the trust to liquidate assets at an unfavorable time. The grantor may need to forgive portions of the note (a taxable gift) if the asset dramatically underperforms.
• IRS scrutiny on inadequate seed gift. If the trust is thinly capitalized, the IRS may argue the "sale" was really a gift with a retained interest — triggering §2036. The 10% seed gift guideline exists precisely to counter this argument.
• Valuation disputes. If you're selling a closely-held business at a discounted value (using FLP/LLC minority discounts), the IRS can challenge the appraisal. A qualified, independent appraisal is mandatory for any non-publicly-traded asset.

Post-OBBBA context for IDGT planning (2026)

The One Big Beautiful Bill Act (OBBBA, July 2025) permanently set the federal estate, gift, and GST tax exemption at $15M per individual ($30M per married couple), indexed for inflation. The 2026 exemption sunset is gone. So does IDGT planning still make sense?

Yes — for three reasons:

1. Estates above $15M. A family with $30M net worth still owes 40% estate tax on $15M above the exemption — $6M in federal estate tax. Moving $15M of future appreciation via IDGT removes the growth entirely from the estate.
2. Future growth. An estate at $14M today may be at $25M in 10 years if the business or real estate keeps growing. The IDGT freezes the value in the estate at the note amount and moves all appreciation outside.
3. State estate tax. Thirteen jurisdictions (12 states + DC) impose estate tax at thresholds far below the $15M federal exemption — often $1M–$2M. Massachusetts taxes at 16% from dollar one above $2M. For families in those states, the IDGT remains powerful regardless of the federal exemption level.