• Uber-rich business owners in high-tax states can save income taxes by not relocating.
• Instead of selling their businesses directly, they entrust their shares to a tax haven state.
• Non-donor incomplete trusts come with some strings attached, but they can pay off nicely.

Top earners continue to flock to states with little or no income taxes Florida and Texas. This is an especially smart move if you’re about to sell a business. As for wealthy entrepreneurs who aren’t ready to make the move, they too can save taxes with the right lawyer.

Business owners can take advantage of other states’ relaxed tax laws by creating a special type of trust. Instead of selling a business outright, they transfer their shares to an incomplete foundation that does not make grants. tax haven state Like Nevada. When shares are sold, the foundation collects the proceeds without paying any state income or capital gains taxes. Trust assets grow free of these taxes and are protected from creditors.

Huntington Bank’s Dan Griffith expects ING trusts to grow in popularity as deals are made following the recovery that coincided with the “silver tsunami”.

“You have baby boomer business owners who need to make the transition, and you also have a ton of capital looking to operate on the sidelines,” said Griffith, Huntington’s director of wealth strategy. “With more agreements comes the greater need for tax-saving strategies.”

Investors can also benefit from putting their portfolios into ING trusts, as this allows dividends to grow free of government taxes. ING trusts are powerful tax avoidance tools; so much so that New York and California have passed laws that would make them useless for state residents. California closed the gap in 2023, estimating that it would increase tax revenue by $30 million that year and $17 million in subsequent years.

Each state also has its own wandering provisions, making setting up INGs cumbersome. But Bank of America’s Timothy Herbst said it could still be worth it in states without very high income tax rates.

“This confidence could conceivably grow without any state income taxes,” the wealth strategy manager said. “That’s a significant savings of 4.5 percent, even in a state like North Carolina. That’s not a huge income tax, but when you look at a very large portfolio that grows over decades, that can be a really significant savings.”

Here’s how ING trusts work

ING trusts are offered in different forms. Nevada and Delaware are popular states where ING trusts reside, and they are called “NINGs” and “DINGs,” respectively. However, Wyoming and South Dakota are also options because they do not tax trust income or capital gains and protect trust assets from creditors.

The person who creates the trust, also known as the settlor, does not have to reside in that state, but the trust must be managed by a third party who does.

Here’s an example of how an ING foundation might work.

Imagine a business owner in Oregon wants to sell a $50 million business that was barely worth $1 million when it was founded. Oregon taxes income and capital gains at 9.9% for top earners. If the company owner sold their shares outright, they would face a tax of $4.8 million. Instead, they transfer their shares to an ING trust in Nevada. When the business is sold, the foundation is exempt from this income tax. The remainder after federal capital gains taxes can be invested and grown free of state and local taxes.

ING trusts are still subject to federal capital gains tax, but ultra-wealthy users of INGs would likely be subject to that burden as well. For a centillionaire, it’s not hard to reach the top rate of 37%, which applies to incomes above $578,126.

“These are super-rich people,” said Bob Lord, a senior adviser on tax policy. Patriotic Millionairesin question. “They still get enough to reach the 37% range.”

Additionally, INGs can be used to benefit from an advantage. tax advantage Profit exemption of at least $10 million from federal capital gains tax for initial shareholders. Nevada attorney Steve Oshins said founders could double their exemptions by establishing an ING foundation.

“This foundation could serve as a second taxpayer so that the individual could qualify for a second $10 million exemption,” he said. “This may be true even if they don’t live in a state with a state income tax.”

In order for the ING foundation to be valid before state authorities, there must be more than one beneficiary in addition to the settlor and his/her spouse. Because beneficiaries must pay state income tax (if any) when receiving distributions. That’s why attorneys recommend that clients take as little distribution as possible and let the assets grow in trust for their children or future generations.

“It is often better for the customer to know that distributions will not go back to him or his spouse,” Herbst said. “If they need those deployments, then that probably wouldn’t be the right strategy.”

However, sometimes it makes sense to take a distribution if there is financial need or if the client has moved to a low-tax state since establishing the ING foundation, Oshins said.

“You just need to look at each fact pattern on its own and make the right decision,” he said.

Buyer beware

1. ING trusts cannot be used to avoid government taxes on wages or rental income.

ING foundations cannot be used to defer income taxes on wages or income from tangible assets in the state. This income, called resource income, is subject to state taxes.

For example, an Ohio resident cannot avoid state or local taxes on income from rental properties in the state even if he or she transfers ownership of the properties to an ING trust in South Dakota, Griffith said.

Griffith advises clients in states with aggressive tax authorities to step away from the day-to-day operations of their business and earn a minimum salary before transferring their shares to the ING trust.

“What you really need to do is actually just be a shareholder, a business owner who says, ‘I’m just getting dividends from this company. I own C-corp shares,'” he said. “In many states, this becomes non-resource revenue.”

2. Establishing an ING foundation is like threading a needle.

These trusts need to be carefully structured to prevent Triggering property tax up to 40% while preserving income tax benefits. In addition to complying with the laws of his home state and tax haven state, the settlor is required to retain certain rights and waive others. For example, the settlor cannot have the power to mandate distributions but must have the right to name beneficiaries at the time of death.

“It’s inherently complex,” Griffith said. “There needs to be quite a bit of processing going on to make the juice worth squeezing.”

3. Trust needs to be well established before the business is sold.

It is easier for a state tax agency to track proceeds from the sale of a business if it is done shortly after the ING foundation is established. Griffith recommends a delay of at least a year, but said that’s the biggest challenge for customers.

“They say, ‘Oh, I don’t want to fund the foundation until we know we’re going to sell it.'” he said. “You have to do this beforehand. And if you do, these are the ones that I’ve seen that are really successful.”