If you expect a big capital gain or have meaningful portfolio income—and you live in a high-tax state—an Incomplete Non-Grantor Trust (ING) can be a powerful way to reduce state income taxes and add asset-protection benefits, without using lifetime gift/estate exemption. You may also hear these called DINGs (Delaware ING) or NINGs (Nevada ING).
Quick idea: You transfer assets to a trust formed in a no-income-tax state, keep the transfer incomplete for gift-tax purposes, and structure the trust so it’s a non-grantor for income tax. The trust (not you) is the taxpayer—often in a state with a 0% income tax.
What an ING trust is (in plain English)
- Incomplete gift: You keep certain powers (e.g., a limited power of appointment) so your transfer isn’t a completed gift—no gift tax and no use of lifetime exemption at funding.
- Non-grantor: An independent trustee and an adverse party (someone with a real economic interest) help ensure the trust—not you—pays the income tax.
- Out-of-state situs: The trust is administered in a state with no or low income tax and favorable trust laws (e.g., NV, DE, SD, WY).
What INGs can accomplish
- State income tax reduction on intangible income (e.g., gains on stocks, mutual funds, certain partnership interests) when properly structured and sourced to the trust’s state.
- Timing & control: Trustees can time sales and distributions strategically.
- Asset protection: When drafted correctly, INGs can add creditor protection features.
- Estate planning flexibility: Because the gift is incomplete, assets typically remain in your estate—often preserving a step-up in basis at death.
Important: INGs do not reduce federal income tax rates. The play is primarily about state-level taxation and asset protection.
When an ING is worth exploring
- You’re planning a sale of low-basis stock or a business interest.
- You have a large, taxable portfolio generating ordinary income and gains.
- You live in (or will soon leave) a high-tax state, but can properly site and administer a trust elsewhere.
- You want asset protection and distribution discipline without making an irrevocable completed gift today.
How the mechanics work (high level)
- Form the trust in a favorable state; appoint an independent institutional trustee there.
- Draft for incomplete gift status (retained limited power of appointment, distribution approvals, etc.).
- Draft for non-grantor status (e.g., distributions require an adverse party’s consent so you don’t retain powers that make it a grantor trust).
- Fund the trust with eligible assets (often securities or interests treated as intangible property).
- The trust sells or holds assets; trust files its own return and pays income tax where it’s administered (often 0% at the state level).
- Distributions are made per the instrument and trustee’s discretion (watch state “accumulation” and throwback rules).
What assets fit (and what usually doesn’t)
Good candidates
- Marketable securities, ETFs, mutual funds
- Interests in LLCs or partnerships that hold intangible assets
- Pre-sale company stock (subject to careful sourcing analysis)
Often poor candidates
- Real estate located in a high-tax state (usually taxed by the property’s state regardless of the trust’s situs)
- Active business income earned in your resident state (often still sourced and taxed there)
Key benefits (and trade-offs)
Benefits
- Potential state income tax savings on intangible income/gains
- Keeps lifetime exemption intact (incomplete gift)
- Asset protection features available in top trust states
- Often preserves basis step-up by remaining in the grantor’s estate
Trade-offs & risks
- Complexity & cost: Requires specialized counsel, corporate trustee, and ongoing compliance.
- State-specific traps: Some states (e.g., CA/NY and others) have look-through rules or anti-ING positions that can still tax residents.
- Sourcing rules: Income from real estate or in-state business activities is usually taxable where earned.
- Distribution timing: Accumulated income may have downstream consequences; coordination matters.
- Federal rules: ING must be drafted precisely to avoid accidental grantor-trust status or a completed gift.
Example (simple and illustrative)
- You expect a $3,000,000 gain on publicly traded stock and live in a 10% state-tax jurisdiction.
- Properly structured, the ING (sited in a no-tax state) sells the stock.
- Potential state tax avoided: ≈ $300,000 (federal tax unchanged).
- You’ve also added a layer of asset protection and distribution control.
(Actual results depend on your state’s residency/sourcing rules, trust drafting, trustee decisions, and timing.)
Steps to evaluate (practical checklist)
- State feasibility screen: Does your resident state respect ING structures for intangible income?
- Scope the transaction: What assets/income are we targeting? What’s the timeline (pre-sale vs. post-sale)?
- Engage specialists: Estate/tax counsel with ING experience + institutional trustee in the chosen state.
- Drafting details:
- Incomplete gift mechanics (retained limited power of appointment)
- Non-grantor status (adverse party consent / distribution standards)
- Spendthrift & asset-protection provisions
- Administration plan: Trustee location, account openings, bookkeeping, returns, and distribution policies.
- Coordinate with your overall plan: Beneficiaries, step-up goals, insurance, and liquidity needs.
- Model the numbers: Compare “no trust” vs. “ING trust” across 5–10 years (state taxes, fees, investable assets after tax).
FAQs
Will an ING help if my asset is a rental in my state?
Usually no—real estate income and gains are typically taxed where the property sits.
Do I give up my money?
Not like an outright gift. The transfer is intentionally incomplete for gift-tax purposes, and distributions require trustee/adverse-party mechanics set in the document.
Can my state still tax me?
Possibly. Some states have anti-ING or residency-based rules that can pull income back into your return. This is why a state-law review is step one.
What about federal estate tax?
Because the gift is incomplete, assets generally remain in your estate—often desirable for the basis step-up. If you want to remove assets from the estate, you’d use different trust techniques.
Bottom line
For the right facts and the right state, an ING can legally reduce state income taxes on intangible income, add asset protection, and preserve future basis step-up—without consuming lifetime exemption today. Execution is everything: get the drafting, trustee, and sourcing right, and model the dollars before you move.
If you’re in Southern Utah (or thinking about moving states), we can collaborate with experienced trust counsel, run the state-tax analysis, and model whether an ING fits your plan. Book a confidential consult and let’s keep more of what matters.
Disclaimer: This article is general information, not legal or tax advice. INGs are highly state-specific—seek personalized counsel before implementing.
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