It’s no secret that here in California, taxes are among the highest in the country. The trust income tax tops out at a whopping 13.3% and can be very costly if you are selling a business or transferring estate assets. Other states have very high income tax rates, as well. If you live in one of these states or own a business in a high-tax state, you will want to look into “ING” trusts that can be established in other lower-tax states.
The U.S. Supreme Court unanimously ruled that a state could not tax an out-of-state resident on trust income without minimum contacts (North Carolina Dept. of Revenue v. Kimberley). Therefore, you can try to orchestrate a move before any major taxable transaction, such as selling a company, settling a lawsuit or selling off Bitcoin. Tax-motivated moves can work with strategic planning and careful timing, but they are not always successful and may force you to move out of a state you would rather stay in for other reasons. California taxes are brutal, but there are plenty of other reasons why people love living here!
A relatively new financial strategy that more business owners and individuals are looking into is the establishment of an “ING trust” (short for “Incomplete Gift Non-Grantor Trust”) in low-tax states like Nevada, Delaware or Wyoming—otherwise known as “NING,” “DING” and “WING” trusts, respectively.
These special trusts are different than typical grantor trusts which require the grantor to include the trust income tax on his or her own return. ING trusts keep the grantor involved. However, they are not the owner and that may act as a loophole for income tax liabilities. New York State has already ruled that the grantor is taxable no matter what. The rules aren’t so clear yet in California, so it is a strategy that some business owners in our state are exploring.
How it works for NING and DING trusts is an institutional trust company is involved. They hold the trust based in that particular state, rather than where the trustee is located. Most trusts are considered taxable based on the state in which the trustee resides. The trust investment or distribution companies should not be residents of the higher-tax state.
NING and DING trusts have been utilized to minimize or avoid California state trust income taxes, though they haven’t worked for everyone. It really depends on a variety of factors and how well all the specific steps are timed and planned out. ING trusts have no bearing on federal income tax rates.
If you are a California business owner considering the formation of an ING trust, you should definitely consult with your tax advisor and/or wealth management advisor. It is not something you should explore or attempt without thorough strategic planning and careful execution.
To learn more about ING trusts and other financial strategies that can help minimize your tax liabilities during a business sale or other major financial transaction, contact Illumination Wealth today.