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Nevada Incomplete Gift Non-Grantor Trust (NINGs) and California Residents

Nevada Incomplete Gift Non-Grantor Trust (NINGs) and California Residents

California residents may have great weather and sunny beaches, but they also have the second-highest capital gains tax in the world. Only Denmark has a higher capital gains tax. Californians also have the highest combined state and federal income tax rates in the United States. Because of this, many native Californians are either moving to neighboring states (like Nevada) or considering it. 

Others are taking advantage of a Nevada Incomplete Gift Non-Grantor Trust, otherwise known as a NING Trust. As a method of reducing California’s high-income taxes, residents of the state may take advantage of a NING Trust. The NING utilizes Nevada’s laws—and no state income tax—to grow wealth and protect assets. 

How Does a NING Trust Work?

The grantor of the NING Trust will transfer the asset or brokerage account with the income tax liability into the NING. Once transferred into the NING Trust, the grantor is no longer responsible for income tax liability on that asset or account. The NING Trust becomes its own income taxpayer. Since Nevada has no state income tax, any income earned on NING assets then avoids California’s high state income tax. 

The capital gains and accumulated ordinary income related to the assets in a NING Trust are not subject to California’s state income tax until such time as the trust beneficiaries receive distributions from the trust.  

Once this occurs, only the distributed amount is subject to the state income tax of California. This only applies when the beneficiary of the trust resides in California at the time the distributions are made. 

What Are the Benefits of the NING Trust?

The trust can serve as an accumulation trust since it is not taxable in California. This (tax-free) growth compounds from year to year. The NING Trust is dissimilar to a regular taxable account, being more like an IRA for tax purposes. Additional benefits include:

  • When beneficiaries of the NING Trust live in another state at the time of the distributions, they will not be responsible for the income tax of California. However, if the state they currently reside in has a state income tax, then they may be subject to that tax at the time of distribution

  • Parents who fund irrevocable trusts on behalf of their children with an expectation that distributions will not be made for many years can significantly benefit from using a NING Trust. 

  • Accumulated funds can benefit the child without distributions being made. As an example, primary home for a grown child could be purchased from the NING Trust, with the trust continuing to hold the home as an asset. This effectively protects the home from creditors, divorce, and estate tax. 

Details of the NING Trust

There is one key caveat to the NING Trust—a California resident may not serve as the trustee of a NING Trust. Often, NING Trusts use an institutional trust company in a state with no income tax, like Nevada. Neither can the investment or distribution committees be California residents. Other NING Trust details include:

  • Undistributed income within the trust can be taxed at a higher federal income tax rate, which obviously affects the overall savings from the NING Trust. 

  • California tax still applies to California source income. Income from investments, however, is not considered California source income. Income from the sale, dividend, gains, or interest on the sale of stock is considered investment income from intangible assets.   

  • The gain from a real estate sale located in the state of California is subject to California tax.

Things to Remember About a NING Trust

Any transfers made to the NING are considered “incomplete gifts.” This means that as far as federal estate and gift taxes are concerned, you have held onto the assets. When you die, the NING assets are included in your taxable estate but will receive a step-up basis for the purpose of income taxes. You can transfer significant assets to your NING without being penalized with a gift tax since the gift is considered incomplete.  

If your goal is to reduce your estate taxes, the “completed” gift version might be a better choice. Following funding of the NING, distributions can be made via a unanimous vote of the Distribution Committee or a majority vote of the Distribution Committee plus that of the Grantor or Grantors. 

A NING works well for intangible assets, such as a brokerage account or shares in a business. If the asset is physically located in California, a NING offers little help with taxes, however, in some instances, tangible assets can be converted to intangible assets. 

Looking for an Estate Planning Attorney?

If you have questions about whether a NING is right for you, call our law firm immediately. We can evaluate your estate and help you make the choices that will best protect your assets. We know California laws that might affect your trust and your assets. We use this knowledge to protect our clients at every turn. Call John Park Law today for a consultation and review, or fill out our confidential contact form

About the Author:

John Park Law

John Park Law is a law firm that helps people organize the elements of their lives through careful estate planning and asset protection measures. Each of our client’s circumstances is reviewed, along with their goals for their estate by a highly experienced attorney knowledgeable in estate planning, probate, business law & real estate. We help people make critical, strategic decisions now, so that your needs are anticipated and your wishes can be implemented later.Serving Nevada, California & UtahWe have offices in Las Vegas, Pleasanton (near the San Francisco East Bay Area) and Cottonwood Heights (near Salt Lake City) and serve clients and their families throughout the US... View full business profile here: John Park Law

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