A Smart Way To Plan For High State Income Taxes: The Nevada ING Trust

As a trust and estates and tax attorney, I am frequently asked by clients (and colleagues) if there are options to reduce the income tax burden they expect to pay on portfolio income or when they expect to experience a liquidity event in the future. Clients who live in high-tax states (e.g., states with a state-level income tax) that have investment assets that generate interest, dividends, royalties, or capital gains are often prime candidates for NING trusts.

A Nevada Incomplete Gift, Non-Grantor Trust, generally referred to as a “NING”, is a trust that is designed to shift income taxes on investment and capital gain income from a “high-tax” individual to a Nevada-based, non-grantor trust. The tax objective is straightforward: to shift taxation of non-sourced investment income and gains from an individual who lives in a high-tax state to Nevada, where there is no state income tax. When properly structured, the Grantor's transfer of assets to the NING is treated for federal tax purposes as an “incomplete” gift (i.e., there is no gift tax on the transfer or use of the Grantor's estate tax exemption) and the trust is treated as a “non-grantor” trust which allows the NING to pay income taxes rather than the grantor.

Basic Mechanics

The grantor contributes assets to a Nevada-based trust while retaining certain powers to ensure that the transfer is “incomplete” for federal gift tax purposes. The NING has a Nevada trustee (often a Nevada trust company) that manages and administers the trust for the benefit of the trust's beneficiaries. The authority for distributions is given to “adverse” parties so that the trust is not treated as a “grantor” trust for federal income tax purposes. The NING, and not the Grantor, then reports and pays income taxes on undistributed income.

Best Fits for NINGs

• Individuals facing large capital gain or liquidity events that are not “sourced” to the individual's home state;
• Investors with marketable securities, long-held stock, or pass-through interests in portfolio income; and
• Families who value asset-protection and governance without having to make “completed” gifts.

Nevada Benefits

• No state income tax;
• Favorable directed-trust laws and experienced trustees, including Nevada-based trust companies; and
• Strong asset protection statutes.

Areas of Caution

• Some states (notably New York and California) have enacted laws which frustrate the purpose and benefits of a NING by treating the trust as a “grantor” trust;
• A NING does not (i) change the grantor's federal tax rates, (ii) eliminate income sourced to the Grantor's home state (e.g., real estate owned in the Grantor's home state), or (iii) shelter wages or service income earned by the grantor in their home state.

Conclusions

In the right circumstances, a NING can meaningfully reduce a person's state income taxes on investment income while preserving their federal estate tax exemption and providing them with asset protection benefits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.