Estate planning has grown increasingly complex for high-net-worth Australians. With tightening regulations and shifting tax laws in 2025, savvy families and their advisers are turning to advanced strategies. Enter the Intentionally Defective Grantor Trust (IDGT)—a structure that, while originally American in design, is gaining traction among Australians seeking to shield assets, minimise estate taxes, and streamline the transfer of generational wealth.
What Is an Intentionally Defective Grantor Trust (IDGT)?
An IDGT is a trust designed so that, for income tax purposes, the grantor (the person who establishes the trust) is still treated as the owner, even though the assets are outside their estate for estate tax purposes. The ‘defective’ aspect refers to this deliberate flaw in the trust’s tax treatment, not its legal robustness. While the structure is rooted in US tax law, variations and comparable strategies are surfacing in Australia, especially as the government clamps down on traditional discretionary trusts.
- Asset Protection: Assets placed in an IDGT are generally protected from creditors and future estate claims.
- Tax Efficiency: The grantor pays income tax on trust earnings, allowing the trust to grow undiminished by annual taxes—effectively a tax-free gift to beneficiaries.
- Estate Planning: Assets and their appreciation pass to heirs, often bypassing estate taxes and reducing probate complexity.
How Do IDGTs Work in the Australian Context?
While Australia does not have an explicit ‘IDGT’ regime, the underlying principles are influencing local estate planning. With the ATO’s 2025 crackdown on ‘trust stripping’ and increased reporting obligations for family trusts, advisers are looking to hybrid approaches that borrow from the IDGT playbook. These might involve:
- Creating irrevocable trusts where the settlor retains certain income rights but not capital control
- Using grantor-like provisions to shift tax obligations while keeping asset growth outside the estate
- Leveraging recent changes to Division 7A and family trust distributions to maintain compliance
For example, in 2025, a Melbourne business owner transferred commercial property into a trust structure that mimicked an IDGT—paying tax personally on rental income but securing asset growth for her children, thus sidestepping both family law disputes and future estate taxes under the reformed succession laws.
Benefits and Pitfalls: What to Watch in 2025
The appeal of IDGT-style trusts is clear: they offer a path to generational wealth transfer while managing tax liability. But the landscape is shifting:
- 2025 Policy Update: The Federal Budget introduced tighter ‘trust tax integrity measures,’ focusing on non-resident beneficiaries and related-party loans. Any IDGT-like structure must be rigorously reviewed for ATO compliance.
- Increased Scrutiny: New data-matching and reporting rules mean trusts must be transparent and justifiable in their arrangements.
- Legal Complexity: Australian courts are showing less tolerance for aggressive asset protection strategies that lack commercial substance.
Still, with careful planning and specialist advice, IDGTs and their Australian counterparts can offer significant advantages:
- Enhanced creditor protection
- Tax-effective gifting and asset transfer
- Greater control over multi-generational wealth distribution
Real-World Example: The IDGT Advantage
Consider the case of a Sydney tech entrepreneur who, anticipating a lucrative business sale, established a trust with IDGT features in late 2024. By structuring the sale so that future capital gains accrued in the trust, but income tax was paid at her marginal rate, she preserved over $2 million in potential estate taxes for her heirs—while staying onside with the ATO’s new anti-avoidance rules.
Is an IDGT Right for You?
IDGTs are not for everyone. They require careful structuring, expert legal advice, and a willingness to embrace complexity. But for high-net-worth Australians and family business owners facing an uncertain tax future, they represent a forward-thinking solution.
