Likewise, when the IDGT purchases property from the grantor, since the IDGT is ignored for federal income tax purposes, the sale does not result in any gift, capital gain or loss, or depreciation recapture.
When a tax-deferred annuity ("TDA") is purchased and owned by an IDGT it will be held in the name of the trust. The grantor will be named as the annuitant and the IDGT will be named as the primary beneficiary. If all the beneficiaries of the IDGT are natural persons, the TDA will continue to accrue growth on a tax-deferred basis. When the annuitant dies, the TDA will continue to accrue growth on a tax-deferred basis. When the annuitant dies, the TDA death benefit will be taxed on the growth. This type of TDA is "annuitant-driven."
If the TDA names an individual as the primary beneficiary rather than the IDGT, instead of taking the lump sum that person may elect to annuitize the TDA over his or her lifetime; the annuitization will stretch the income tax consequences over the primary beneficiary's lifetime. Additionally, if the named primary beneficiary is the spouse of the annuitant, he or she may elect to continue the TDA, rather than liquidate it.
In light of the above, does it make any sense to use an IDGT and TDA in Veterans benefits or Medicaid planning? Some would argue "yes," while others would argue "no." It really depends on which state the applicant resides in and his or her intentions regarding the use of the TDA.
# # #
Krause Financial Services specializes in helping families qualify for Medicaid benefits through the use of Medicaid Compliant Annuities, and Veterans Aid & Attendance benefits through the use of various life and annuity insurance products.