Softening the Blow of California Income Taxes with a NING Trust

The New York Times recently published an article about how the California Bay Area is about to experience a huge financial shakeup. Several high-profile companies are about to go public including Uber, Lyft, Airbnb, and Pinterest. With what the NYT refers to as “IPO-palooza,” companies worth upwards of $200 billion will create millionaires overnight.

While this is great news for the newly minted millionaires, it could cause a strain on San Francisco’s economy, displacing many people from their homes and making the already expensive city even less affordable. Moreover, with the new State and Local Income Tax (SALT) deduction capping at $10,000, even the new wealthy Californians will be scrambling to look for ways to protect their assets from massive capital gains and income taxes.

With new money (and lots of it) in their bank accounts, this new generation of millionaires will be looking to buy homes, cars, boats, and more. But, hopefully, they will also be interested in investing and protecting their wealth. We’ve had a favorable economy for a while now, and a correction will inevitably come.

While a luxury or two is certainly well-deserved, ensuring that this hard-earned financial windfall lasts for generations is also important. In order to grow and compound wealth, the new Bay Area wealthy might consider working around the state’s high-income tax rate by establishing an ING trust.

Should New Millionaires Establish California Trusts?

California has notoriously high taxes all around, but its state income tax can be a real burden, up to 13.3%. Often, wealthy California residents will establish trusts outside of the state of California to avoid these high taxes with some even physically moving their residences outside the state of California.

However, even moving out of California right before an income event may not even insulate a wealthy California resident from taxes. The state’s aggressive Franchise Tax Board has found ways to tax people regardless of their move. A newer approach is to create a Nevada Incomplete Non-Grantor Trust or NING. Moving a portion of assets as incomplete gifts to a no income tax state, like Nevada, will protect those assets from hefty taxes created by the new SALT cap.

NINGs Could be the Answer to California State Tax

New and established millionaires alike could benefit from establishing a NING trust in which the donor makes an incomplete gift to the trust and assigns an independent trustee. Alliance Trust Company of Nevada provides independent trustee services for many families establishing NING trusts.

By establishing an independent trustee the grantor is still involved, but not considered the owner. A NING trust allows any income or gains by the trust not to be taxed until it’s distributed, at which point the trustee may have moved out of California and can avoid income tax on these gains.

Deferring taxes over years creates a compounding effect that can yield high returns even when just working around state income tax. Utilizing a corporate trustee, such as Alliance Trust Company of Nevada, to administer an incomplete non-grantor trust (ING) in a state with no income tax is becoming a popular solution for wealthy entities in high-tax states.

Why Nevada?

The state of Nevada is one of a few states with no state income tax, but more than that, Nevada’s trust protection is considered to be the best in the country. With several cases which have set precedents in favor of protecting trusts, Nevada has proven to be more in favor of trust protection than any other state including protection from creditors and divorcing spouses.

You never have to live in Nevada as long as you maintain a Nevada trustee. Other benefits include a short seasoning period on trusts and no corporate income tax. You can see a full list of Nevada’s advantages over other states here.

Does the Benefit Outweigh the Risk?

There are quite a few hoops to jump through when establishing a NING, however, with an experienced trust attorney, this should not be a barrier. After establishing a NING, it may be that you will have to pay some California tax.

Alliance works with many attorneys specializing in NINGs. Architecting a NING that focuses on your individual situation and the specific assets being placed in the trust is crucial to meeting your objectives with a NING. We would be happy to refer you to an appropriate attorney.

ING trusts are still being tested in the courts of every state but New York, so there’s no certainty about how California will react yet. It does seem that the state will react with audits before their legislature.

So if you’re about to hit a financial windfall, the calculated risk of establishing a NING could pay off exponentially when it comes to income tax. In which case, the benefit would certainly outweigh the risk.

If you want to learn more about establishing a NING trust contact our experienced team for more information.