A Proactive Approach to Wealth Management May provide Families Significant Savings on State and Local Income Tax (SALT)
Taxpayers could be scrambling after the Federal Tax Reform passed at the end of 2018 capping state and local income tax (SALT) deductions at $10,000. For many wealthy families in high-tax states, this deduction will only cover property tax and won’t touch capital gain income or other investment income.
While California is attempting to pass the Protect California Taxpayers Act which allows taxpayers to deduct some taxes as “charitable contributions,” for many the bill feels like a workaround or even tax evasion, and it’s unclear whether the IRS will allow such a bill to pass.
Rather than waiting for legislation to pass that is more protective of taxpayers, many residents from states like California are considering leaving the state or taking other measures to protect their wealth.
Moving out-of-state is not a feasible option for many. However, moving assets out of a high-tax state may be an ideal solution.
What are My Options?
Traditionally, grantors gift away income-generating investments to beneficiaries who live in tax-favored states. However, these gifts often incur federal gift tax or utilize some of the grantor’s exclusion for a gift and estate tax.
A newer option is the NING trust or Nevada Incomplete Gift Non-Grantor Trust. There are several tax-sheltered states in the U.S., but only a few allow Incomplete Gift Non-Grantor Trusts and the most tax-favored state for such a trust is Nevada. The NING allows a trust to avoid taxation by the grantor’s home state until assets are distributed, or, rather, the gift is complete.
Why Choose a NING?
By transferring assets into a NING, the assets become a separate taxpayer receiving the tax benefits of Nevada. Because transfers are not completed gifts, there is no federal gift tax exclusion.
For those who live in high-income tax states, such as California, establishing a NING to transfer some of the tax burdens to Nevada allows them to take advantage of Nevada’s no income tax benefit.
Additionally, Nevada has the most robust creditor protection and protection as its considered a “spendthrift trust” in Nevada. Nevada also has tested protection from divorcing spouses which has held up in Nevada Supreme Court with Klabacka v. Nelson.
The Components of a NING Trust
An ING trust only works in a state with no state income tax. Otherwise, a tax will apply to the trust. Nevada is the preferred state for an ING trust as it carries many other protections and benefits to grantors and beneficiaries.
ING trusts cannot be grantor trusts under the income tax laws of the grantor’s state of residence. Only states that allow self-settled spendthrift trusts (asset protection trusts) can form non-grantor trusts enabling the settlor to be a beneficiary, such as Nevada.
The incomplete gift portion of the ING trust is critical to ensure that the contributions to the trust are not treated as a gift and subject to federal gift tax. It’s essential for the settlor to have lifetime power of appointment and post-death power – which the ING trust allows.
NING trusts will be subject to federal estate tax when the settlor dies, however, if the estate is not large enough to trigger federal estate tax, this is not an issue.
Who Should Consider Establishing a NING
Although a NING has many benefits, the benefits may not be for every grantor. Here are some of the criteria which would make someone a good candidate for a NING trust.
- Grantor lives in a high-income state – such as California.
- Grantor carries intangible assets with substantial tax exposure.
- Grantors in the highest federal tax bracket who would remain in that bracket after transferring assets to a NING.
Should YOU Establish a NING?
NING trusts can be an excellent option for those looking to preserve wealth and protect it from their state’s high tax rates. Since changes to SALT are recent, there are still some questions about how the IRS will respond to attempts to shield wealth from taxes. However, the NING appears to be the best option to do so.
It’s important to work with a trusted advisory team or trust company that is familiar with Nevada Tax Law and NINGs to ensure it’s the right choice for your family and that you’re gaining the most benefit possible.
At Alliance Trust Company, we’re experts in Nevada Trust Law and have a network of attorneys specializing in NINGs. We are available to walk you through your particular situation regarding NINGs. Contact us to learn more about preserving your wealth in the state of Nevada.