The Nevada incomplete gift non-grantor (NING) trust is a tool designed to provide affluent individuals with a legal avenue for asset protection and tax optimization. These specialized trusts leverage Nevada’s advantageous tax codes and trust-friendly laws, enabling residents of high-income-tax states to shield certain assets from those taxes. If you need help protecting your assets and optimizing your tax strategy, consider speaking with a financial advisor.
How Does a NING Trust Work?
As a non-grantor trust, a NING trust is considered a separate tax entity, distinct from the person who created it (known as the settlor or grantor). As a result, the trust is taxed as an independent entity, separate from the grantor.
This potentially reduces the grantor’s income tax burden by shifting income to the trust, which may be subject to a lower tax rate depending on its structure and the nature of its income. Since NING trusts are established in Nevada, they benefit from the state’s lack of income tax.
The “incomplete gift” aspect refers to the fact that for gift tax purposes, the transfer of assets to the trust does not constitute a complete gift. This allows the grantor to remove assets from their taxable estate without immediately incurring gift taxes, a feature that contrasts with many other trust structures.
Residents of high-tax states can potentially save a significant amount on state income taxes by using a NING trust. For example, a resident of New Jersey could avoid the state’s top income tax rate of 10.75% on certain assets by moving them into a NING trust.
Which States Have Banned NING Trusts?
Not all high-income-tax states allow residents to use ING trusts, though. New York outlawed them in 2014 after state lawmakers pointed to the need to maintain the integrity of New York’s tax system.
California followed suit in 2023 when Gov. Gavin Newsome signed a bill effectively banning ING trusts. As PwC noted in its explanation of the law, the state now treats California residents who transfer assets into ING trusts as the owners of those entities and subjects distributions from the trusts to state income taxes.
How Are Distributions From NING Trusts Taxed?
The state of Nevada offers a particularly favorable tax environment for ING trusts, primarily because it does not impose a state-level capital gains tax or state income tax. When assets within a NING trust are sold, the gains from such sales are not subject to state capital gains taxes, which can be a significant advantage.
For example, in states like California and New York, where capital gains can be taxed at rates as high as 12.3% and 10.90% respectively, the absence of such a tax in Nevada allows for a more favorable return on investment for the trust’s assets. The capital gains are shielded from the state tax burden that would otherwise diminish the profits from asset sales.
However, while the NING trust itself benefits from Nevada’s tax laws, distributions to beneficiaries are subject to the tax regulations of the beneficiary’s state of residence. For example, a beneficiary living in New Jersey may face the state’s top marginal income tax rate of 10.75% on distributions received from the trust. In contrast, a beneficiary residing in Texas, which does not levy a state income tax, would not incur additional state tax on the same distribution.
To illustrate how these trusts operates and the potential tax implications for beneficiaries, consider scenario of a tech entrepreneur in Oregon who establishes an ING trust in Nevada. By transferring their startup shares into the trust before an initial public offering, they could potentially avoid the high state capital gains tax when those shares are sold. However, if the beneficiaries of the trust are also in Oregon, they would still be subject to state taxes on any distributions.
In addition to state tax implications, it’s important to note the federal tax implications of NING trusts. While NING trusts can offer protection from state capital gains taxes, they are still subject to federal capital gains taxes.
How to Establish a NING Trust
The process of establishing a NING trust is intricate and requires careful attention to detail. Initially, one must understand the purpose of the trust and ensure that it aligns with their financial objectives, such as minimizing state income tax liability, estate planning or charitable giving.
Once the purpose is clear, the next step is to select a trustee. This is a pivotal decision as the trustee will be responsible for managing the trust assets. It is recommended that the trustee is either a Nevada resident or a Nevada-based entity to comply with the state’s laws and to maintain the trust’s favorable tax status.
Following the selection of a trustee, the creation of the trust document is the next critical step. This document should be drafted with the assistance of a legal professional to ensure that all provisions comply with Nevada law and reflect the trust’s objectives. A typical NING trust document includes essential elements such as the declaration of trust, identification of the grantor and trustee, the trust’s purpose, instructions for asset management and distribution, provisions for successor trustees, and clauses addressing the trust’s duration and termination.
The final step in establishing a NING trust is transferring assets into the trust. Common assets transferred into a NING trust include intangible assets like securities and interests in closely held businesses. The process for transferring these assets involves retitling them in the name of the trust and, in some cases, formally recording the transfer with the appropriate government agency or financial institution.
Pros and Cons of NING Trusts
A NING trust can provide some clear financial advantages under certain conditions. However, this type of trust is not without its potential drawbacks.
Advantages of NING Trusts
- Tax benefits: One of the primary advantages of a NING is its potential for tax savings. Nevada does not impose state income tax, which means that the trust can generate income from investments that are not subject to state income tax. This is particularly beneficial for residents of states with high income tax rates. Additionally, because the trust is “incomplete” for gift tax purposes, the transfer of assets into the trust does not constitute a taxable gift.
- Asset protection: Nevada trusts offer strong asset protection features. Assets held within a NING are generally protected from creditors, lawsuits, and even divorce settlements. This makes them an attractive option for individuals looking to safeguard their wealth.
- Flexibility and control: The settlor of a NING retains a significant degree of control over the trust assets. Since the trust is designed as “incomplete” for gift tax purposes, the settlor can change the beneficiaries, trust terms, or even terminate the trust if circumstances change.
- Privacy: Nevada law provides for the confidentiality of trust arrangements, which can be an important consideration for individuals seeking to maintain their privacy. Trust documents and the identities of the beneficiaries can be kept out of the public domain.
Disadvantages of NING Trusts
- Complexity and Costs: Establishing and managing a NING requires navigating complex legal and tax rules. This typically necessitates the involvement of experienced attorneys and accountants, leading to high initial setup and ongoing management costs.
- IRS scrutiny: While NINGs are legal, they are subject to scrutiny by the Internal Revenue Service (IRS). The IRS may challenge the tax benefits claimed by these trusts, particularly if they believe the trust has been structured primarily to evade taxes. Such scrutiny can lead to audits and potential disputes with tax authorities.
- Potential for changes in law: Tax laws and regulations are subject to change, and what may be advantageous today could be less so tomorrow. Changes in federal or state law could diminish the benefits of NINGs or introduce new drawbacks.
Bottom Line
The Nevada incomplete gift non-grantor (NING) trust is a financial instrument for affluent individuals seeking to mitigate state income tax liabilities and enhance asset protection, particularly in high-tax states. While they offer the potential for significant tax optimization and control over assets, the effectiveness of NING trusts is subject to an individual’s circumstances and the evolving landscape of state legislation, as seen with bans in states like New York and California.
Tips for Establishing a Trust
- When planning your estate, it’s important to understand the different types of trusts that are available. For example, a bypass or A-B trust splits a couple’s assets and transfers them into two trusts when the first spouse dies. The first trust is “filled up” with enough assets to match the state and federal estate tax exemption, while the rest of the couple’s assets are transferred to a marital trust belonging to the surviving spouse.
- A financial advisor can help you explore different tax-effective strategies for structuring your finances. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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