Ep. 94 How to Lower Your Capital Gains Taxes with Adam Buchwalter
Navigating State Taxes on Capital Gains
For high-net-worth individuals, founder-led business owners, and C-level executives, managing capital gains taxes is a crucial component of wealth preservation. In this episode of Live Life Liberated, Centura Wealth Advisory’s Managing Director, Derek Myron, speaks with Adam Buchwalter, Partner at Wilson Elser, about the intricacies of state-level capital gains taxes and strategies to mitigate them. Listen to the full episode here:
The Challenge: High State Capital Gains Taxes
Some states, like California, New York, and New Jersey, impose significant capital gains taxes—reaching up to 14.4% in California. Meanwhile, there are eight states with zero capital gains tax, including Alaska, Florida, Nevada, South Dakota, Texas, and Wyoming.
“For state tax to be imposed, there has to be nexus to the state. That’s where tax planning becomes an opportunity.” — Adam Buchwalter
So how can individuals in high-tax states legally reduce or eliminate their capital gains taxes? Adam and Derek dive into key strategies.
Strategy 1: Setting Up a Non-Grantor Trust
One of the most effective ways to mitigate state capital gains taxes is by setting up a non-grantor trust in a tax-friendly jurisdiction.
- A non-grantor trust is its own tax-paying entity, domiciled in a state with no capital gains tax.
- The trust, rather than the individual, sells the asset, eliminating state-level taxation.
- Popular states for these trusts include Nevada, South Dakota, and Delaware.
“Conceptually, if a trust is set up in Nevada and sells the asset, there simply should be no state income tax.” — Adam Buchwalter
Strategy 2: ING Trusts—And Why They No Longer Work in Some States
Incomplete Non-Grantor (ING) Trusts, including NINGs (Nevada) and DINGs (Delaware), were once a go-to strategy. However, in 2014, New York eliminated ING trust benefits by taxing them as grantor trusts. In 2023, California followed suit with SB 131, making them ineffective for California residents.
“Governor Newsom decided to follow New York’s lead, and as of 2023, California residents can no longer use INGs to avoid state capital gains taxes.” — Adam Buchwalter
For individuals already holding assets in ING trusts in these states, options include:
- Converting the trust into a completed gift non-grantor trust.
- Using the assets to fund private placement life insurance (PPLI).
- Relocating to a tax-friendly state before liquidation.
Strategy 3: The QTIP Trust Approach
For married couples, a Qualified Terminable Interest Property (QTIP) Trust presents another viable option. This structure allows one spouse to transfer assets into a trust that benefits the other spouse, effectively shielding capital gains from state taxation.
- The trust must be structured as a non-grantor trust.
- Capital gains allocated to principal remain untaxed at the state level.
- The income generated must be distributed to the spouse, subject to state tax.
“With a QTIP trust, the capital gains portion stays in the trust and remains state tax-free, while income is distributed to the spouse.” — Adam Buchwalter
Key Considerations for Capital Gains Planning
While these strategies offer significant tax-saving potential, they require careful execution.
- Trustee Selection Matters: The trustee must reside in a tax-friendly state.
- Legal & Compliance Risks: Taxing authorities may challenge aggressive tax planning.
- Opinion Letters for Protection: A legal tax opinion can help defend against state audits and eliminate penalties in case of disputes.
“Having an opinion letter from a top law firm can provide protection against penalties in the event of an audit.” — Derek Myron
Final Thoughts: Act Before the Exit
The best tax planning happens before a liquidity event. Business owners planning a sale or individuals with highly appreciated assets should explore options early.
“Anyone with a business, a stock portfolio, or other highly appreciated assets in high-tax states should consider these strategies before their exit.” — Adam Buchwalter
Contact Information
- Adam Buchwalter – Partner, Wilson Elser
📞 (973) 735-5784 | ✉️ adam.buchwalter@wilsonelser.com - Derek Myron – Managing Director, Centura Wealth Advisory
✉️ dmyron@centurawealth.com - Centura Wealth Advisory
📞 (858) 771-9500 | 🌐 Centura Wealth Advisory
DISCLAIMER
The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Centura Wealth Advisory. The content has been made available for informational and educational purposes only and is not intended to be a substitute for professional investing advice. Always seek the advice of your financial advisor or other qualified financial service provider with any questions regarding your investment planning.
Centura Wealth Advisory (Centura) is an SEC-registered Investment Advisor with its principal place of business in San Diego, California. Centura and its representatives comply with current registration and notice filing requirements imposed on SEC-registered investment advisors in states where Centura maintains clients. Centura may only transact business in states where it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Past performance is no guarantee of future results. Tax relief varies based on clients’ circumstances, and all clients do not achieve the same results.
