It’s the year 2017. The tax world seems to be relatively similar to that of 2016. But one tax-saving technique seems to have certainly taken on a life of its own this year. This technique is called a NING Trust.
In prior years, although there were plenty of individuals creating NING Trusts, this technique was relatively unknown throughout the estate planning industry. However, it seems that 2017 has been the Year of the NING as many tax practitioners have noticed the exponential growth of this strategy! Suddenly, a technique that hadn’t yet gone mainstream in prior years has become widely-accepted and is being promoted by a seemingly larger number of tax professionals than in prior years.
What is a NING Trust?
The term “NING Trust” stands for Nevada Incomplete Gift Non-Grantor Trust. Transfers to the trust are incomplete for gift tax purposes which means that there is no gift tax for any transfers to the trust. However, for income tax purposes, transfers to the trust are complete and the trust is a non-grantor trust so that the trust pays all income taxes at its federal income tax brackets. Since Nevada has no state income tax, there is no state income tax on income earned by the NING Trust.
Who is the Typical Client?
The primary use for a NING Trust is to save state income taxes. Therefore, the typical client is a resident of a state with a high state income tax who is either selling a business or other asset that will have a large capital gain or who has an asset, such as a large brokerage portfolio, that has sizable distributions that would be taxed by the client’s home state if the client hadn’t set up the NING Trust. It is important to note that income earned by an asset, such as a locally-run business or local real estate, is considered sourced to the client’s home state and therefore cannot avoid state income taxes using the NING Trust.
The trust must be sitused in a jurisdiction that has Domestic Asset Protection Trust statutes in order to avoid being a grantor trust for income tax purposes. Nevada is generally considered the leading Domestic Asset Protection Trust jurisdiction which is why it is also the leading state for these trusts. A NING Trust is simply a non-grantor Domestic Asset Protection Trust. In addition, the chosen jurisdiction must not have a fiduciary state income tax. That excludes many of the Domestic Asset Protection Trust jurisdictions, leaving only Nevada and a small handful of other states where this technique is viable.
How the NING Trust Works
Unlike nearly every other estate planning technique, the NING Trust requires the client to give up some control.
First, since the NING Trust can’t have any trustees who live in the client’s home state, the client can’t be a trustee and therefore loses direct managerial control over the trust assets. However, the client can retain the power to remove and replace trustees, so this loss of control is merely indirect control with the presumption being that the selected trustees will invest based on the client’s wishes.
Second, the NING Trust must have a Power of Appointment Committee (also sometimes called a Distribution Committee) made up of adverse parties initially selected by the client from the potential distributees of the trust. This Committee makes distribution decisions either (a) by unanimous vote or (b) by majority vote plus the vote of the client. The client cannot retain the power to remove and replace the Committee members, so the technique does not work well for a dysfunctional family.
Federal Income Tax Advantages
The NING Trust isn’t limited to residents of states with a high state income tax rate. Many estate planners overlook the federal income tax advantages that can be obtained using a NING Trust.
For example, the Power of Appointment Committee can sprinkle up to $14,000 (the 2017 annual exclusion amount) of income each year to each of the client’s children and grandchildren who may be in a much lower federal and state income tax bracket. This can be increased to $28,000 each year if the client is married.
Secondly, most planners don’t realize that the income earned by the NING Trust is not subject to the Pease limitations that would otherwise reduce the client’s personal federal income tax deductions had the income been reported on the client’s personal income tax return. Although this is not a significant advantage in comparison to the other potential advantages, it’s just one more often-overlooked benefit that can be obtained.
The NING Trust has finally gone mainstream. So far, 2017 has been the year of the NING Trust!
If you would like more information about NING Trusts, you might be interested in Steve’s 60-minute educational program entitled, “The NING Trust: Saving Significant State Income Taxes for Your Clients in High State Income Tax Jurisdictions”.
For more information, click here.
ABOUT THE AUTHOR
Steven J. Oshins, Esq., AEP (Distinguished) is an attorney at the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada, with clients throughout the United States. He is listed in The Best Lawyers in America®. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011 and was named one of the 24 Elite Estate Planning Attorneys in America by the Trust Advisor. He has authored many of the most valuable estate planning and asset protection laws that have been enacted in Nevada. He can be reached at 702-341-6000, ext. 2, at email@example.com or at his firm’s website, www.oshins.com.
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