The 2017 tax reform legislation continues to motivate many high net worth clients to examine existing estate plans in light of the temporarily expanded transfer tax exemption ($11.4 million per person in 2019, which, under current law, will revert back to around $5.6 million in 2026).
Because of the changes brought about by tax reform, ING trusts have taken on new value—and may be the hottest new trend in estate planning for 2019. For the right client, ING trusts can generate significant savings both in income taxes and in overall transfer (gift, GST and estate) taxes—meaning that it can be worthy to explore the ING trust strategy even in light of the IRS Section 199A regulations limiting certain trust planning workarounds.
ING Trusts: The Basics
An ING trust is an intentionally non-grantor trust (or an irrevocable non-grantor trust) that is primarily designed to generate income tax savings, but can also have substantial value from an estate planning perspective in light of the temporary nature of the enlarged estate tax exemption. Central to the ING trust strategy is the presence of an “adverse party”—or a group of adverse parties—who control trust distributions to beneficiaries.
Where a group or committee of adverse parties is selected, it may even be possible for the trust creator to serve as a member of that committee. Adverse parties can include adult children, although a committee format is generally recommended in order to provide additional assurances that the IRS will regard the trust as a non-grantor trust.
In many states, with the notable exception of New York, ING trusts are either subject to reduced income tax rates, or are not subject to state income tax at all. ING trusts are commonly formed in states that do not tax trust assets regardless of where the client lives—Delaware, Wyoming and Nevada tend to be popular states for ING trusts.
Gifts to the trust can be either incomplete, allowing the trust creator to retain a degree of control over the assets and avoid gift taxes, or complete—meaning that the transfer would create a deduction from the client’s lifetime transfer tax exemption amount.
ING Trusts and Post-Tax Reform Planning
Both the proposed and final Section 199A regulations upset many non-grantor trust strategies by adding a new provision that requires aggregation of two or more trusts in certain circumstances. The aggregation rules apply in the Section 199A context and beyond—meaning that they are also relevant for those planning to use ING trusts to avoid the SALT cap.
In general, aggregation is required if the trusts have substantially the same grantor or grantors, and substantially the same beneficiary or beneficiaries, if the principal purpose of forming the trust or contributing additional assets to the trust is the avoidance of income tax. This means that for income tax planning purposes, ING trusts will be most valuable to clients who have multiple natural beneficiaries who can each serve as beneficiary of one trust, or for clients who can justifiably point to a significant non-tax reason for the trust formation.
Showing that a significant non-tax purpose exists is not as complicated as it may seem. Significant non-tax reasons that would promote the likelihood of the IRS respecting the separate ING trusts often include aggregation of ownership within the family, savings generated by centralized asset management, avoidance of repetitive asset transfers within the family, asset protection or to relieve a transferring family member of asset management burdens.
For transfer tax purposes, the calculus on whether a complete or incomplete gift to the ING trust is most beneficial has changed post-reform—primarily because the IRS has released guidance providing that clients will be allowed to make large gifts from 2018-2025 (when the $11.4 transfer tax exemption is in place) without fear of any kind of “clawback” if the client dies in a later year, when the exemption is lower.
This adds a new element into the mix as, historically, most clients actively took steps to avoid making a complete gift in order to avoid current gift tax liability. In light of the expanded exemption and confirmation that current large gifts will not generate adverse tax results, more clients will likely wish to explore the implications of making a complete gift instead.
As is the case with any trust, ING trusts can be complicated, and require the assistance of expert tax advice both in their creation, and in first examining the individual circumstances of the client to determine whether the ING trust will prove valuable.
- Check out previous coverage of post-2017 tax reform trust planning in Advisor’s Journal.
- For in-depth analysis of estate planning techniques, see Advisor’s Main Library.
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