WINGs, NINGs or DINGs? Minimizing State-Level Taxes
Planning to minimize the impact of state-level income taxes remains highly relevant even in the wake of the One Big Beautiful Bill (OBBB). While the OBBB did increase the overall cap on state and local tax deductions (the SALT cap), the law includes phaseouts that limit the value of the expansion for higher-income taxpayers in high-tax states. While there's little that can be done with respect to state-sourced income, important planning opportunities exist for clients with investment assets that generate significant income in the form of dividends, interest, etc.—and for those clients who expect to experience a liquidity event. Incomplete gift non-grantor trusts (commonly known as ING trusts) can be a valuable tool to shift taxes on investment income away from an individual in a high-income tax state to the trust in a no-tax state. Despite their value, it's also important to exercise caution when using INGs to reduce taxes—and understand the potential pitfalls.
INGs: The Basics
Because INGs are non-grantor trusts, they're taxed separately from the grantor. The trust itself is treated as an entirely separate entity for income tax purposes. By establishing the trust in a state with no income taxes, the grantor is able to move the income from their high-tax home state to the no-tax state. Delaware, Wyoming and Nevada are common locations for INGs (these trusts are known as DINGs, WINGs and NINGs, respectively).
Absent any distributions, income on the assets is taxed to the trust, not to the grantor—essentially removing that income from the high-tax state.
While income on assets transferred to the trust is taxed to the trust, the assets remain in the grantor's estate for estate tax purposes. That's because the "gift" of assets to the trust is intentionally rendered incomplete due to the fact that the grantor retains certain powers over the trust. The grantor's estate and gift tax exemption and exclusions are not impacted by the transfer of assets to the trust.
The specific retained powers can vary. It's common for a donor to retain the power to revest title in the property to themselves or to retain the power to name new beneficiaries or change the interests of beneficiaries. ING grantors often retain power to veto or approve trust distributions. These and other retained interests allow for non-grantor treatment—thus allowing the trust to be taxed as an independent entity—yet cause the trust assets to remain in the grantor's estate.
In order to ensure non-grantor trust treatment, authority over distributions is given to an adverse party (grantor trust income is taxed to the grantor, because a grantor trust and the grantor are treated as a single taxpayer).
Understanding the Potential Drawbacks
First and foremost, taxpayers should understand that the ING strategy is only useful for minimizing tax liability with respect to non-sourced income (typically, investment gains). INGs cannot be used as tax shelters with respect to the taxpayer's wages or income for services performed by the taxpayer.
Similarly, INGs cannot eliminate taxes with respect to income that can be "sourced" to the taxpayer's home state. Income from real estate investments within the taxpayer's home state is a key example of this state-sourced income.
Taxpayers should also carefully evaluate the state laws that apply in their home state. New York and California are two key states that have passed laws to treat INGs as grantor trusts for state tax purposes—essentially eliminating the state tax benefits of the ING.
As such, the ING strategy is most advantageous for clients who are expecting large capital gains and other liquidity events that cannot be "sourced" to the taxpayer's home states. Taxpayers with significant marketable securities or long-term stock holdings may find INGs particularly valuable.
ING owners should also be cautious about taking distributions from the ING. It's possible that the ING could be reclassified as a grantor trust under IRC Section 674 if the owner takes distributions without approval from an independent trustee or power-of-appointment committee (i.e., an adverse party).
Conclusion
INGs are complex trust structures. Under the right circumstances, they can be incredibly valuable from a state income tax perspective—however, it's important to evaluate the client's unique circumstances and applicable state laws when structuring the ING itself.