A Nevada Incomplete Gift Non-Grantor Trust (NING) is an irrevocable trust designed to limit your state income tax liability, preserve wealth, and ensure your assets are protected utilizing Nevada’s laws. A NING Trust may be an appropriate strategy for you if you are a high-income earner or if have a large capital gain on the sale of an asset, such as a business, and live in a high-income tax state.
You as the grantor of the trust transfer the asset or brokerage account with the income tax liability to the NING Trust. Once the transfer is complete, you are no longer responsible for the income tax liability because a NING is a complex trust. The trust is responsible for the income tax, and if the trust is set up in Nevada where there is not a state income tax, the income earned on the assets in the NING Trust avoids state income tax.
It is best to break down the name of the NING to get a better understanding of its features and benefits:
Nevada – A NING Trust is drafted under Nevada’s laws. It is a self-settled trust, meaning you are the creator of the trust and a primary beneficiary. You as the grantor of the trust would want to receive distributions from the trust, so you would need to have the trust drafted under one of the nineteen states that have a “self-settled” Asset Protection Trust Statute.
Incomplete Gift – Transfers to the trust are considered incomplete gifts for gift and estate tax purposes. The assets in the NING are included in your estate at death and will receive a step-up in basis. This allows you to transfer a large value of assets to the NING without being subjected to the gift tax. Remember, NING Trusts are done for state income tax planning during your lifetime, not estate tax planning. If your goal is to do both state income tax and estate tax planning, you may want to consider a completed gift trust instead of a NING.
Non-Grantor – A NING is a non-grantor trust, meaning the trust is the taxpayer for income tax purposes. Nevada does not have a state income tax, so if the trust is a Nevada trust, potentially no state income taxes will need to be filed.
Name: John Doe
Residency: New Jersey
Occupation: High-income earner (e.g., business owner, investor)
Assets: Significant investment portfolio and a family-owned business
Objective: Reduce or eliminate state income taxes on investment income and capital gains
Establishing the NING Trust in Nevada:
John establishes a NING Trust in Nevada, a state with no income tax, by selecting a corporate trustee based in Nevada (or an individual trustee residing in Nevada).
The trust is structured as a non-grantor trust, meaning that the trust itself, rather than John, is treated as the taxpayer.
Importantly, John makes an "incomplete gift" to the trust. This ensures that the assets are transferred into the trust but John retains certain rights, preventing the transfer from being considered a completed gift for federal gift tax purposes.
Funding the Trust:
John transfers his investment portfolio, including stocks, bonds, and other financial assets, as well as interests in his family-owned business, into the NING Trust.
The assets are now legally owned by the trust, not by John personally.
Income and Gains Generated within the Trust:
Any income generated by the investments within the trust (e.g., interest, dividends, capital gains) is attributed to the trust, not to John.
Because the trust is domiciled in Nevada, the income is not subject to New Jersey state income tax.
Distribution Strategy:
John, as the trust's grantor, can receive distributions from the trust. However, distributions to John may be subject to New Jersey state tax, depending on how they are structured.
To optimize tax savings, the trust could reinvest the income rather than making distributions, deferring taxes until a time when it might be more tax-efficient for John to receive distributions.
Key Considerations:
Control: John retains some control over the trust via his retained rights, but this is carefully structured to ensure that the trust is a non-grantor trust for federal income tax purposes. Federal Taxes: The trust still pays federal income tax on its earnings. However, the primary goal is the elimination of state income taxes on these earnings.
Trustee Discretion: The Nevada trustee has discretion over the distributions, ensuring that the trust’s status as a non-grantor trust is maintained.
Example Outcome:
Before the NING Trust: John was paying New Jersey state income tax on his investment income and capital gains, potentially at a high rate (up to 10.75%).
After the NING Trust: The income generated by the trust is not subject to New Jersey state income tax, potentially saving John significant sums annually.
Legal and Tax Advice: John should work closely with his estate planning attorney, tax advisor, and the corporate trustee to ensure the trust is properly structured and complies with all relevant laws.
A NING can only own intangible assets, such as stock in a business or your brokerage account. The trust cannot own tangible assets such as your office building, inventory, or artwork. The strategy is recommended for stock sales and not asset sales. If your asset is bolted to the ground or physically located in the high-income tax state (source income), the strategy may not work. There are ways to convert tangible assets to intangible assets, but we recommend you discuss those with your tax or legal advisors.
Here are some questions you may want to ask yourself to see if a NING strategy makes sense in your situation:
A NING Trust is a non-grantor trust, which means the trust is treated as the owner for income tax purposes. An experienced attorney should draft a NING Trust because following the guidelines to make sure it is a non-grantor trust is crucial to shift the income tax liability to the trust instead of you as the grantor. One of the key characteristics is to make sure the trust has a “Distribution Committee.”
A “Distribution Committee” is comprised of three adverse parties. To qualify as a non-grantor trust, these adverse parties must have discretion regarding distributions from the trust, and they must also be beneficiaries. You as the grantor have to give up enough control to make the trust a non-grantor trust, but not so much control that the trust becomes a completed gift.
A NING Trust may not work for you depending on the state in which you reside and how that state views taxation of a trust. New York, for example, has enacted a law to negate the use of the NING Trust strategy. Other states will automatically impose a state income tax if you are a resident of the state when you establish the trust. It is important to check with your tax and legal advisors to determine whether the NING Trust strategy will work for you.
IconTrust has extensive experience in administering NING Trusts. We can provide you with a free consultation from our administration perspective. We can also provide a list of attorneys who can help you draft a NING Trust.
If you have any questions, please email info@icontrustnv.com or call 702-998-3700
