InvestingRetirementTax Tips
Incomplete Non-Grantor Trusts (NING/DING): The “State Income Tax” Firewall
Incomplete Non-Grantor Trusts (NING/DING): The “State Income Tax” Firewall
โ ๏ธ STRATEGY DECLARATION
This strategy is widely accepted in professional practice for residents of many states, but it has been effectively legislated out of existence for residents of New York and California. Success depends entirely on the grantor’s state of residence not having specific “Throwback Rules” or “Incomplete Gift Clawbacks.”
This strategy is widely accepted in professional practice for residents of many states, but it has been effectively legislated out of existence for residents of New York and California. Success depends entirely on the grantor’s state of residence not having specific “Throwback Rules” or “Incomplete Gift Clawbacks.”
* Note: This is an L3 ($10M+) framework for residents of High-Tax States (NJ, OR, HI, MN, etc.) preparing for a liquidity event.
Core Definition: “A NING (Nevada) or DING (Delaware) is an irrevocable trust designed to shift the income tax liability of a major asset sale from your high-tax home state to a zero-tax jurisdiction, without triggering federal gift tax.
* Warning: Real Estate cannot be used here (it is sourced to the physical location). Only intangible assets (Stocks, Crypto, IP) qualify.
Core Definition: “A NING (Nevada) or DING (Delaware) is an irrevocable trust designed to shift the income tax liability of a major asset sale from your high-tax home state to a zero-tax jurisdiction, without triggering federal gift tax.
* Warning: Real Estate cannot be used here (it is sourced to the physical location). Only intangible assets (Stocks, Crypto, IP) qualify.
๐ WHO THIS IS FOR (Prerequisites)
- Required Profile: Founders or Investors holding highly appreciated Intangible Assets (Pre-IPO Stock, Crypto) residing in high-tax states (Top rate > 8%) like New Jersey, Oregon, or Massachusetts.
- Primary Objective: State Tax Arbitrage (Eliminating the 8% – 13% state capital gains tax on a large exit).
- Disqualifying Factor: Residency in New York or California (Statutory Disqualification) or holding Real Estate (Situs Rules apply).
โ ๏ธ STRATEGY ELIGIBILITY CHECK
This strategy works only if your home state treats the trust as a separate taxpayer and respects its Nevada/Delaware domicile. It fails if:
- โ๏ธ Asset Type Restriction: You cannot move a Manhattan apartment into a NING to avoid NY tax. Real property is taxed where it sits. It strictly applies to Stock, Bonds, Crypto, and Intellectual Property.
- โ๏ธ The “Non-Grantor” Status: The trust must be structured so that YOU are not the owner for income tax purposes. This requires giving up specific controls (IRC 671-678) and often requires an adverse party (Distribution Committee) to approve distributions.
- โ๏ธ The “Incomplete Gift” Status: You must retain enough power (e.g., Power of Appointment) so that the transfer is NOT a completed gift. This prevents you from owing 40% Gift Tax on the transfer.
EXECUTIVE SUMMARY
- The Premise: You live in New Jersey (10.75% Tax). You are selling $20M of Crypto. You face a $2.15M State Tax bill on top of Federal Tax.
- The Structure: You transfer the Crypto to a NING Trust (Nevada Domicile, 0% Tax) before the sale.
- The Mechanism: The Trust sells the Crypto. Since the Trust is a Nevada resident and a “Non-Grantor” entity, it pays $0 State Tax. (It still pays Federal Tax).
- The Result: You save $2.15M immediately. The capital stays in the trust to compound. If you distribute it to yourself later, you pay NJ tax then (Deferral). If you distribute to beneficiaries in low-tax states, the tax is eliminated forever.
- The Failure: If you live in NY or CA, state laws now “look through” the trust and tax you as if you sold it personally.
“Geography is the ultimate tax shelter.” A NING Trust allows your assets to ‘move’ to Nevada, even if you stay in New Jersey. Source: PLR 201310002 / Oshins & Associates
๐ MODEL METHODOLOGY & ASSUMPTIONS
- Scenario: Sale of $10M Zero-Basis Stock.
- Residency: High-Tax State (10% Rate) vs. Nevada (0% Rate).
- Federal Tax: 23.8% (Constant).
- Constraint: Assumes Home State respects the NING (e.g., NJ, PA).
Performance Simulation (The State Tax Arbitrage)
| Metric | Personal Sale (High Tax State) | NING Trust Sale (Nevada) | Delta (Wealth Shift) |
|---|---|---|---|
| Gross Gain | $10,000,000 | $10,000,000 | – |
| Federal Tax (23.8%) | ($2,380,000) | ($2,380,000) | – |
| State Tax (10%) | ($1,000,000) | $0 (Nevada Situs) | Save $1M Cash |
| Net Investable Capital | $6,620,000 | $7,620,000 | +15% More Capital |
| 10-Year Growth (7%) | $13,021,000 | $14,988,000 | Compounding on Savings |
| Total Wealth Effect | Baseline | +$1.96 Million | Arbitrage Win |
*Chart Note: The benefit is pure “State Tax Alpha.” If the grantor moves to a 0% tax state (like FL) before taking distributions from the NING, the $1M savings becomes permanent.
Advanced Mechanics: The “Distribution Committee”
*The price of tax savings is loss of unilateral control.
| Role | Function | Why it’s needed |
|---|---|---|
| Grantor (You) | Requests distributions. | You cannot simply take money out. You must ask. |
| Distribution Committee | A group of “Adverse Parties” (usually beneficiaries like adult children) who must approve distributions. | IRC 672(a): Their approval requirement breaks the “Grantor Trust” status, shifting the tax liability from You to the Trust. |
| Nevada Trustee | Administers the trust assets in Nevada. | Provides the “Situs” (Jurisdiction) to claim 0% tax. |
Strategic Mechanics: The NY/CA “Clawback”
How the Empire Strikes Back:
- New York (2014): Passed legislation classifying any Incomplete Gift Non-Grantor Trust created by a NY resident as a Grantor Trust for state tax purposes. Result: NY taxes you anyway.
- California (2023): Passed SB 131, which taxes the net income of an Incomplete Gift Non-Grantor Trust if the grantor is a CA resident. Result: Strategy dead for CA residents.
- Opportunity: This strategy remains highly effective for residents of states that have not yet closed this loophole (e.g., NJ, OR, MA, HI).
โ BOUNDARY CLAUSE: Operational Limits
- Costs: Setup ($20k-$40k) and Annual Fees ($5k-$10k) mean this is only viable for tax savings >$100k (e.g., Gains >$1M).
- Funding Timing: You must transfer assets to the NING before a binding letter of intent (LOI) to sell is signed. If you transfer after the deal is locked, the “Assignment of Income” doctrine applies, and you are taxed personally.
๐ค DECISION BRANCH (Logic Tree)
IF Resident = New York / California:
โข Input: Strict Anti-NING statutes.
โข Output: STOP. Use CLAT (#569). A NING will not save you state tax here. Look for Federal deductions instead.
IF Resident = New Jersey / Oregon / Mass:
โข Input: High state tax, no specific NING ban.
โข Output: Execute NING. Significant arbitrage opportunity exists for large liquidity events.
“Federal tax is uniform; State tax is a patchwork.” The NING Trust exploits the holes in the patchwork before they are stitched up.
Disclaimer: This content is for educational purposes only. NING/DING trusts are subject to rapidly changing state laws. While legally valid in Nevada/Delaware, your home state may disregard the trust for tax purposes. Requires a “Distribution Committee” to function. Consult a Tax Attorney specializing in Multi-State Taxation.