ING Trusts (Potentially Avoid State Taxes)

An Incomplete Non-Grantor Trust is a specialized trust that may allow you to avoid state taxation on Capital Gains.

Strategy Overview

An ING trust is a unique type of trust that effectively may allow you to avoid paying state taxes on capital gains. By setting up the ING trust in a state with no-taxation, and the transferring your appreciating stock into the trust, the sale of the stock will be taxed according to the state the ING trust is setup and administered in, instead of where you live.

Tax Details

If you live in a state with high taxation, a commonly asked question is "how can I avoid state taxes." While in most cases that's difficult and requires relocating, one tool that may help is an incomplete non-grantor trust (known as an "ING" trust). In short, an ING trust is a unique type of irrevocable trust that by-and-large is designed to shift taxation to another state (almost always one that does not have income taxes).

An ING trust is setup to predominately "thread the needle" in regards to a number of requirements. If setup correctly, an ING trust has a number of unique and beneficiary properties:

• An ING trust is an irrevocable trust, and get its own taxpayer ID (important for the assets it holds to be taxed as a trust).

• Assets gifted into the trust retain the giftors holding period and tax basis (consistent with IRS gifting rules). This is especially important when an individual has a significant amount of highly appreciated stock that they are considering selling.

• The ING trust is setup in such a way that the asset transfer is considered "complete" for the purposes of the assets becoming part of the trust. This is key, as the assets are then taxed in the state the trust is administered in (assuming all criteria are met); which is almost always a 0% tax rate state.

• An ING trust is setup in such as way that the asset transfer is considered "incomplete" for the purposes of gifting. This unique structure and language allows the contributed of assets into the trust to avoid gift taxes, which would be detrimental and invalidate the benefits of this strategy.

• ING trusts are also typically "self-settled" trusts, meaning the Grantor (i.e. the individual who contributed stock into the trust) is also the Beneficiary (the person who will own the trusts assets).

Federal capital gains still apply. It's important to note that federal capital gains taxes still apply on the sale at the federal level regardless of this arrangement. However, the sizable state-level tax savings remain a significant advantage.

Important: Some states, such as New York and California have prevented ING Trust being used to escape higher taxes. Consult a tax professional.

Key Benefits

• Avoid state capital gains taxes. By transferring your appreciated stocks into an ING Trust set up in a state with no income tax, you can avoid state capital gains taxes when the trust sells the stocks.

• No need to relocate. The ING trust is set up and administered in a no-tax state, which means you don't need to physically move to that state to reap the tax benefits.

Key Considerations/Flags

• Costs. ING trusts can be costly to set up and administer. It's important to balance these costs against the potential tax savings.

• Legal recognition. Not all states recognize ING trusts for state tax purposes. Both New York and California have passed laws that does not recognize these trusts (obviating their benefit).

• Legal risks. There's a risk that more states could challenge or disallow ING trusts in the future. This could affect the trust’s ability to provide the intended tax benefits.

Strategy: When to Consider This and When to Avoid It

🟢 When to Consider This Strategy:

• If you have large stock gains and live in a high-tax state (other than NY). If you have significant stock gains, using an ING trust could help you avoid state taxes on the sale of your stock; especially if you live in in a state with high capital gains taxes.

• If you live in a state that does not conform to federal guidance for QSBS. As detailed in QSBS/State Taxes can Be More Complicated, multiple states opt not to confirm to IRS guidelines for the treatment of QSBS (and still tax it). If you live in one of these states and will have QSBS gains, an ING trust could help reduce your tax bill (by allowing the sale of shares to qualify at the state level via the state the ING trust is setup in)

🔴 When to Not Use This Strategy:

• If you life in New York or California (or possibly other states if they pass new laws). Residents of these states are not able to benefit from ING trusts. Other states have tried to pass legislation mandating similar rules.

• Small or uncertain stock gains. If you have small or uncertain stock gains, the cost and complexity of setting up and managing an ING trust may not be worth the potential tax benefits.

Example