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