By Steven J. Oshins, Esq., AEP (Distinguished)
One of the most anticipated tax cases in some time has begun its way through the courts.
On January 26, 2023, the Washington Supreme Court heard arguments in Chris Quinn v. State of Washington which is a case examining the constitutionality of the Washington State 7% capital gains tax.
The Washington capital gains tax was passed by the Democrats and signed into law in 2021. There’s a $250,000 exemption for individuals and married couples, so only the capital gains in excess of $250,000 are subject to the tax. Capital gains taxes would not be applied to sales of real estate, retirement accounts, livestock and timber, or small businesses.
In March of 2022, a Douglas County Superior Court judge ruled that the tax violated the state constitution which requires property to be taxed at a flat rate, whereas the law, as written, only applies to those Washington residents whose capital gains exceed $250,000. The Washington Supreme Court will now look at whether this ruling should be overturned.
Do ING Trusts Work for Washington Residents?
What happens if the Washington Supreme Court rules that the law is constitutional?
The most well-known planning technique to avoid state capital gains taxes is a so-called “ING Trust”, otherwise known as an Incomplete Non-Grantor Trust. These are mostly done in Nevada (NING Trust) and Delaware (DING Trust), but there are a handful of states where this technique works.
However, Washington’s capital gains statute specifically disallows ING Trusts much in the way that New York disallowed them by statute as of 1/1/2014. Therefore, just as we do for New York residents, we would not be able to use ING Trusts here and would otherwise use Completed Gift Non-Grantor Trusts instead.
Completed Gift Non-Grantor Trusts
There are multiple alternative Completed Gift Non-Grantor Trusts.
*Completed Gift Non-Grantor Trust for Descendants: This trust is simply a trust that doesn’t violate any of the grantor trust rules and can be set up using the laws of any state that has no state fiduciary income tax on trusts. Therefore, the neither the settlor nor the settlor’s spouse is a beneficiary of this trust. The trust is generally set for the benefit of the settlor’s descendants, but other beneficiaries can be added too.
*Completed Gift Non-Grantor Trust for Spouse and Descendants: This trust can be set up using the laws of any state that has no state fiduciary income tax on trusts. But in addition to that requirement, the trust must also require any one adverse party (such as a child of the settlor) to approve any distribution. The advantage of including the settlor’s spouse is that the settlor retains indirect access through distributions to the settlor’s spouse.
*Completed Gift Non-Grantor Trust for Settlor, Settlor’s Spouse and Descendants: The trust must be set up using the laws of a state that has a Domestic Asset Protection Trust statute and no state fiduciary income tax on trusts. Just like the spousal option described above, the trust must also require any one adverse party (such as a child of the settlor) to approve any distribution. The advantage of including the settlor is that the settlor retains access. However, there is still an open question regarding whether the trust is includible in the taxable estate of the settlor if the settlor isn’t a resident of a Domestic Asset Protection state. To this date, after many, many years of these statutes, this author isn’t aware of even one case where such a trust was ruled to be in the settlor’s taxable estate. Therefore, the odds appear to be very favorable, but still the planner should factor in the estate inclusion risk in determining whether to use this option.
If you found this article interesting, you might also be interested in these other educational programs and products by Steve Oshins:
- The Spousal Lifetime Access Trust: A Gifting and Creditor Protection Technique
- Estate Planning Techniques in a Time of Low Interest Rates
- The Installment Sale to an Intentionally Defective Grantor Trust
- The Grantor Retained Annuity Trust: Significant Estate Tax Savings with Nearly Zero Gift Tax Risk
- Steve’s FREE State Rankings Charts
ABOUT THE AUTHOR
Steven J. Oshins, Esq., AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011. He has been named one of the 24 “Elite Estate Planning Attorneys” and the “Top Estate Planning Attorney of 2018” by The Wealth Advisor and one of the Top 100 Attorneys in Worth. He is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates/Tax Law Lawyer of the Year in 2012, 2015, 2016, 2018, 2020 and 2022. He can be reached at 702-341-6000, ext. 2, at email@example.com or at his firm’s website, www.oshins.com.