The intentionally defective grantor trust: a strategy for Swiss resident US persons engaging in US gift tax exemption planning

Abstract

US Persons (including foreign residents) should prepare for the reduction in the US estate and gift tax lifetime exemption scheduled for 2026. A common planning strategy is to set up irrevocable trusts to divest themselves of part of their wealth. However, for US Persons living abroad, a transfer into trust can result in double taxation of income with no treaty relief. An intentionally defective trust can thread this needle, constituting a completed gift for US lifetime exemption purposes while allowing the application of mechanisms to prevent double taxation of income.