Income tax savings with an ‘incomplete gift non-grantor trust’ (ING)

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Elsewhere we asked and answered “What is an ‘intentionally defective grantor trust’ (IDGR) and how does it work as an estate planning tool?” Here we want to turn to another tax planning opportunity called the ‘incomplete gift non-grantor trust’ which is created and administered entirely in a state that has no fiduciary income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming (How States Treat Taxation of Trusts).

First, an Incomplete Gift Non-Grantor Trust is an irrevocable inter-vivos trust that must not have contacts with the state where the grantor resides. Second, as discussed here, the grantor must avoid retaining any interest or powers that would turn the non-grantor trust into a grantor trust. Third, at the same time it is crucial that those powers that prevent funding of the trust that would result in a completed gift are affirmatively retained and exercised. Very briefly, these may include a power to consent to discretionary distributions directed by a distribution committee, a non-fiduciary power to distribute the principal to family members subject to an ascertainable standard, and a non-general testamentary power of appointment.

In other words, an Incomplete Gift Non-Grantor Trust (ING) “is a self-settled, irrevocable trust for the benefit of the grantor and other named beneficiaries”. The grantor is generally a resident of a high-income tax state, such as California, and the trust is settled in a state with low or no state income tax, such as Nevada.

The grantor ensures that the ING is a non-grantor trust for income tax purposes so that trust income is not taxable to the grantor and thus not subject to tax in the grantor’s state of domicile.

Additionally, the transfer to the ING is an incomplete gift for gift tax purposes so that the grantor preserves his exclusion amount for future transfers (or perhaps has no remaining exclusion at the time of the transfer to the ING).

The incomplete gift also ensures that the trust assets are includible in the grantor’s estate and receive a step-up in basis upon the grantor’s death.

Finally, an ING is an asset protection trust formed in a state with favorable asset protection laws and no state income tax or no tax on nonresidents, such as Delaware, Nevada, Ohio, or South Dakota.” Source: Incomplete Gift Non-Grantor Trusts, L. R. DeMoss D’Andrea.

See also: Incomplete Non-Grantor Trusts: The Basics

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