Ep. 83 ING Trusts: How to Minimize State Income Taxes
The Power of an ING Trust: Reducing State Income Taxes
For high-net-worth individuals living in high-tax states, state income taxes can be a significant financial burden. However, there is a way to lower these taxes without physically moving: an Incomplete Non-Grantor (ING) Trust. In episode 83 of Live Life Liberated, Centura Wealth Advisory’s Kyle Malmstrom and Roby Kotcamp explain how ING Trusts work, their benefits, and potential pitfalls to avoid.
Why Consider an ING Trust?
“Moving your assets, not your address, is a key strategy for minimizing state income taxes,” says Malmstrom.
State tax rates vary dramatically across the U.S. While some states, like South Dakota, have no state income tax on trusts, others, like California and Hawaii, impose rates exceeding 10%. By transferring assets to an ING Trust domiciled in a zero-tax state, individuals can reduce their tax liability without uprooting their lives.
Who Can Benefit from an ING Trust?
Not all assets are suitable for an ING Trust. Kotcamp outlines the ideal candidates for this strategy:
- Business owners planning an equity sale (not asset sales)
- Individuals with highly appreciated stock or other investment assets
- Those with income-generating portfolios who do not require immediate access to the funds
“Anything in the capital gains category, like a concentrated stock position or a business sale, is a prime candidate for an ING Trust,” Kotcamp explains.
The Mechanics of an ING Trust
To take full advantage of this strategy, it’s crucial to follow the correct sequence of steps:
- Establish the Trust: The ING Trust is created in a state with no income tax on trusts (e.g., South Dakota, Wyoming, or Nevada).
- Transfer Assets: The highly appreciated assets are re-registered in the name of the ING Trust before any sale.
- Complete the Sale: Once inside the trust, the assets are sold, ensuring that the transaction occurs in the tax-friendly state.
- Reinvest the Proceeds: The funds remain in the trust and continue growing tax-free from a state income tax perspective.
By executing these steps correctly, individuals can legally avoid paying state income taxes on qualifying transactions.
Potential Pitfalls to Avoid
While an ING Trust can be an effective tax-saving tool, there are key considerations:
- Bad Drafting: Incorrect trust language can jeopardize the tax benefits. “You need an experienced attorney who understands ING Trusts inside and out,” warns Malmstrom.
- State-Level Challenges: Some states, like California and New York, have passed legislation that disqualifies ING Trusts.
- Misuse of Distributions: Pulling money from the trust improperly can negate the tax savings. Instead, structured loans or strategic distributions should be considered.
- Step Transaction Doctrine: The IRS may scrutinize the timing of asset transfers and sales to determine if the trust was established solely for tax avoidance.
Alternatives for California Residents
With the passage of SB 131, California has effectively eliminated the use of ING Trusts. However, Kotcamp highlights alternative solutions:
- Inter Vivos QTIP Trust: This strategy can achieve up to 75% of the tax savings an ING Trust offers.
- ESBT Election for S-Corps: Certain business owners can structure their income in a way that minimizes state taxes.
- Strategic Relocation: If planned correctly, physically moving at a later date can still offer tax advantages.
Is an ING Trust Right for You?
“ING Trusts have been around for over 20 years, but they require precise execution,” says Malmstrom. If you’re considering selling a business or managing highly appreciated assets, working with an experienced wealth advisory team is essential.
Centura Wealth Advisory specializes in tax-efficient planning for high-net-worth individuals. To explore whether an ING Trust or alternative strategy is right for you, contact us at Centura Wealth Advisory or call (858) 771-9500.
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. The content 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 you may have 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 are in compliance with the current registration and notice filing requirements imposed on SEC registered investment advisors in which Centura maintains clients. Centura may only transact business in those states in which 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 client circumstances and all clients do not achieve the same results.
