Trusts to Beat State Taxes

People with income and wealth are more concerned these days with beating state taxes than federal taxes. That is especially trust for residents of states such as New York and California with very high tax rates. This Bloomberg.com piece shows how people who are considering asset sales, especially of businesses, are moving assets to trusts headquartered in Delaware or Alaska to avoid losing a big chunk of their wealth to state income taxes. It’s not for everyone but shows the importance of good advice when a lot of money is involved.

“The way that states go about taxing trusts is, shall we say, all over the map,” said Dick Nenno, managing director and trust counsel at Wilmington Trust, a Delaware-based subsidiary of M&T Bank Corp. (MTB) “And that creates some real planning opportunities.”

Using a Delaware Incomplete Non-Grantor Trust, or DING, wealthy residents of high-tax states take advantage of vague or conflicting definitions in state and federal laws. They can move assets just far enough out of their control so they aren’t liable for state income taxes without moving them far enough to trigger a 40 percent gift tax.

Because the trusts are private, there is no comprehensive data on how much money has moved across state borders in recent years or how much revenue the high-tax states are losing. Nevada figures show that trusts there hold $18 billion in assets, up from $8 billion in 2008.