INGTrust Wealth Preservation Maximize your ING in 2021 (California Grantors)

If you are expecting to sell an intangible asset such as stock in a company in 2021, you should strongly consider the integration of an INGTrust into your estate, asset protection and succession plans and complete your transaction before June 30, 2021. Three states in the U.S. offer a trust described as an incomplete gift non-grantor trust (ING). Of the three states, Nevada is considered by many to be the most robust in protecting the attributes of all of its resident statutory trusts. Lobb & Plewe (LP) has a customized ING for its clients in the INGTrust Wealth Preservation (“INGTrust”) structure. Many states such as California will likely follow the lead of New York in coming years and eliminate some of the benefits of an ING Trust. Tracking legislative efforts and timing transaction “events” will be key when considering ING implementation. As discussed below, California may eliminate any tax benefit associated with INGs effective June 30, 2021.

At L&P, we stress the importance integrating the four concepts of estate planning, asset protection, succession planning and tax optimization into your personal planning. The INGTrust successfully integrates all four concepts and creates an incredible wealth preservation tool. In addition to being a complete estate and asset protection plan, the INGTrust offers clients the possibility of deferring and managing state income taxes in the grantor’s or beneficiary’s state of residence. In a high state tax environment such as California, the benefits are substantial.

New Proposed Legislation:

For years, California lawyers, financial planners and CPAs have been very conservative in recommending the use of INGs because of the aggressive nature of the California Franchise Tax Board. However, in November of 2020, in recognition of the viability of INGs, Legislative Proposal C (the “Proposal”) was presented at the California Franchise Tax Board’s (FTB) Stakeholders Meeting. The Proposal notes the following:

“ING trusts are generally treated as taxable trusts. A California resident grantor is able to establish an ING trust with a nonresident trustee and transfer assets to that trust. By doing so, the taxable income of the ING trust, generally intangible income, is sourced to the commercial domicile of the nonresident trustee for California income tax purposes. (Revenue and Taxation Code (R&TC) sections 17742, 17743, and 17744.) This allows a California resident to transfer assets to an ING trust, with an out-of-state trustee in a jurisdiction that does not have a state income tax, and not pay California state income taxes.”

If passed into law, the Proposal will eliminate tax benefits associated with INGs for California grantors. The Proposal will add a new Section 17082 to the Revenue and Tax Code to treat INGs as grantor trusts effective as of June 30, 2021. The result of the proposed legislation is that an ING established by a California resident, who is still a California resident as of June 30, 2021, will become subject to California income taxation on all income after June 30, 2021. The proposal in and of itself is an admission by the FTB that INGs are a valid means of deferring California state income tax.

NING Trust Structure:

A NING is a Nevada ING. It is a Nevada trust with special provisions causing the gifts to the trust to be incomplete for gift tax purposes yet at the same time a non-grantor trust. This means it is a separate tax entity from the grantor or the person who creates and initially funds the trust. To receive the tax benefits, the trust must have a Nevada trustee who is independent from the grantor of the trust andhe beneficiaries should be contingent, or distributions to the beneficiaries should be made in the discretion of the trustee,; especially if the beneficiaries are California residents.

NING Trust Tax Optimization:

California taxes the income of a trust based on the residences of the trustees and beneficiaries. If the trustee is a California resident, the trust pays taxes on the income. If the beneficiary is contingent, then income to the trust is not taxed until it is distributed to the beneficiary. If the contingent beneficiary receives a distribution, then the beneficiary is taxed by California only if that beneficiary is a California resident.

If the trustee is a Nevada resident and the beneficiaries are non-California residents or California resident contingent beneficiaries, the income not sourced to California is not taxed by California. California source income includes such items as rental income or any other type of income derived from the ownership, control, or management of real or tangible personal property within California, gains realized from the sale of such property, income from a trade or business conducted within California, and income from certain intangible personal property.

Ownership in a company is an intangible asset which would not be taxed if owned by a properly drafted NING prior to June 30, 2021, under the Proposal. Thus, if you are going to sell membership interests in an LLC or stock in a corporation in the foreseeable future, integrating the ownership into a NING could be very beneficial. The INGTrust structure is tailored to maximize tax benefits and can be seamlessly integrated into your estate plan, asset protection plan, succession plan and tax optimization plan.

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