Rudolph Angler High earners continue to flock to low or zero-income tax states like Florida and Texas—a particularly savvy move for those planning to sell a business. For wealthy entrepreneurs not yet ready to relocate, strategic tax planning through specialized trusts can offer substantial savings.
By establishing an incomplete non-grantor (ING) trust in tax-friendly states such as Nevada, business owners can sidestep state income and capital-gains taxes. Instead of selling their business outright, they transfer shares to an ING trust, which collects proceeds from sales free from state taxes, allowing the assets to grow tax-free while being shielded from creditors.
Dan Griffith of Huntington Bank anticipates a rise in ING trust popularity, especially as deal-making rebounds amid a “silver tsunami” of retiring baby-boomer business owners. With more deals on the horizon, Griffith sees growing demand for tax-saving strategies to meet the needs of sellers and investors alike.
For investors, ING trusts also allow portfolios to grow without state tax deductions on dividends. However, states like New York and California have moved to close this loophole for residents, with California estimating an additional $30 million in annual tax revenue from its 2023 changes. While ING trusts can be complex to establish, Bank of America’s Timothy Herbst notes that they’re often worth the effort in states with lower income tax rates.
How ING Trusts Work
ING trusts come in various forms, depending on the state. Nevada and Delaware are popular choices for these trusts, known respectively as “NINGs” and “DINGs,” but Wyoming and South Dakota also offer similar benefits, including no trust income tax and robust asset protection.
Though the trust’s creator, or settlor, need not live in these states, a local third party should administer the trust. ING trusts still incur federal capital gains taxes, but most high-net-worth individuals would be subject to this rate regardless. According to Bob Lord of the Patriotic Millionaires, ING trusts are typically geared toward ultra-wealthy individuals who already fall into the highest tax brackets.
Additionally, ING trusts may offer a tax exemption benefit for early shareholders, who can exclude at least $10 million in profits from federal capital gains tax. Nevada lawyer Steve Oshins explains that such trusts can double this exemption by acting as a second taxpayer, allowing entrepreneurs to maximize tax breaks even outside of low-tax states.
To be recognized by state tax authorities, an ING trust must have multiple beneficiaries beyond the settlor and spouse. Beneficiaries may pay state income taxes on distributions, so attorneys often advise clients to limit distributions, allowing assets to grow tax-free for future generations.
ING Trusts and Source Income
ING trusts can’t be used to defer income taxes on salaries or state-based income, known as source income. For instance, Ohio residents would still pay state taxes on income from rental properties within Ohio, even if the properties are held in a South Dakota-based ING trust. Griffith advises business owners in high-tax states to reduce their involvement in day-to-day operations and collect a minimal salary before transferring ownership to an ING trust. By distancing themselves from active management, owners can classify earnings as dividends, which are non-source income in many states.
Establishing an ING trust requires careful structuring to balance income tax benefits with potential estate taxes, which can reach up to 40%. The settlor must navigate both home-state and trust-state laws, maintaining certain rights while relinquishing others—for example, they can’t compel distributions but can name beneficiaries.
Timing Is Key
Setting up an ING trust well before a business sale is crucial, as tax authorities are more likely to scrutinize trusts established right before a sale. Griffith recommends at least a year of separation between trust creation and sale, though clients are often reluctant to fund a trust until a sale is definite. Nevertheless, Griffith finds that clients who plan in advance see the most success in maximizing the trust’s benefits.