Why Wealthy Families are Choosing to Shift Their Wealth to the Tax-Favored State of Nevada
The state of Nevada is considered a tax-favored environment, allowing maximum tax protection over trusts and estates. That’s just one of the reasons why more and more people are choosing Nevada to establish their trusts.
The “NING” trust or Nevada Incomplete-gift Non-Grantor trust reduces state income tax liabilities and simultaneously provides asset protection benefits.
For people with substantial income, assets, or large capital gains who could generate significant Federal and state income tax shifting a trust from its current state to a state with more favorable tax laws, such as Nevada, could create significant income tax savings.
While moving to Nevada would allow someone to take advantage of these benefits, relocating family is often not an option. However, by establishing a NING and transferring assets from the existing trust into the NING, the trust will only face Federal capital gains taxes.
Non-Grantor vs. Grantor Trusts
Trusts are set up as either grantor or non-grantor, and it’s important to understand the difference.
Grantor trusts expose the creator of the trust to the taxes incurred by the trust. Non-grantor trusts are set up as their own entities incurring all taxes at the trust level instead of passing them on to the owner of the trust.
Things get murky because every state has its own taxation rules and definitions about which trusts should be considered a resident.
For example, to take advantage of a NING or Nevada’s favorable tax laws in general, a non-grantor trust with a Nevada trustee should be established. By establishing a non-grantor trust in Nevada and appointing a Nevada trustee you can be sure that you’ll minimize or completely eliminate taxes from your state of residence.
A New Aggressive Strategy for Substantial Gains
If a substantial gain is on the horizon, wealthy families can take advantage of ING trusts to adopt a more aggressive tax strategy. ING’s help reduce state income tax at the trust level by establishing it one or more years before a large gain becomes available.
One word of caution, there are specific steps you should follow to ensure that your strategy is not viewed as tax evasion, it’s always best to employ professional guidance to understand how to establish your ING ethically.
Structuring a NING for Maximum Benefit
Since the purpose of establishing a NING trust is to avoid additional taxing, it’s important to properly structure the trust to avoid gift tax. Proper structuring also ensures that the trust really is taxed in Nevada instead of the settlor’s home state.
Remember that NING stands for Nevada Incomplete-Gift Non-Grantor Trust, so when assets are transferred to the trust, it must be in the form of an “incomplete gift.”
Transferring assets as an “incomplete gift” allows the owner of the trust to include your investments in your estate without needing to file a Form 709 gift tax return.
NING Trusts vs. DING Trusts
The DING Trust did come before the NING trust, so one may wonder which is the better situs for a trust, Nevada or Delaware?
While both states allow settlors to appoint a trustee for their trust and take advantage of favorable tax laws, several Delaware rulings have allowed divorcing spouses and creditors to gain access to an asset protection trust. Nevada has never allowed such access in rulings and therefore has more iron clad protection than any other state.
How the Other States Feel About ING Trusts
It’s no surprise that other states aren’t happy about non-grantor trusts and their tax-avoidance benefits, some have even gone as far as banning such trusts.
While both Delaware and Nevada have successfully deflected attempts by other states to tax grantors, that likely won’t stop states from attempting to gain access whenever they can.
However, several statutes in the state of Nevada prove that the state values and protects trusts and estates which are established there and is the safest bet when choosing where to create an ING trust.
To learn more about establishing a NING, please contact Alliance Trust Company.