Trusts That Are Trimming Taxes

 Despite the funny-sounding names, incomplete grantor trusts are serious tax-minimization tools.  These trusts are often formed in Delaware, Nevada and sometimes Wyoming (hence the acronym, “DING,” “NING” and “WING”) because these states do not tax the income of trusts established there, even by people who live elsewhere, or have favorable tax rules. 

Advisers say this strategy is especially in demand with residents of California and New Jersey, where top marginal income-tax rates are 13.3% and 9.97%.  New York, another high-tax state, came down on the practice last year and no longer allows residents to use the trusts to avoid state taxes.  

One risk is that additional states could negate the tax benefits for their residents.  Moreover, people contemplating the creation of such trusts should think about timing.  If an asset put into a trust is immediately sold and the money distributed back to the person forming it, which is likely to raise red flags with state tax authorities as a sham. Yet by creating a trust, selling the assets years down the line then distributing them some time thereafter is less likely to raise negative attention.

See Liz Moyer, Trusts That Can Trim State Income Tax, The Wall Street Journal, Jan. 23, 2015.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.