By Steven J. Oshins, Esq., AEP (Distinguished)

It finally happened.  California passed SB 131 in its 2023 legislative session which, among other things, sadly contains a provision treating all so-called Incomplete Non-Grantor Trusts (“ING Trusts”) as grantor trusts taxed to the settlor.

This takes away a key tool planners have used for many years to reduce California state income tax on taxable income not sourced to California.

The legislation is effective retroactive to January 1, 2023, so many California residents were wrongly punished for following the law that existed prior to the date this legislation passed.  It remains to be seen whether an ultra-wealthy California resident will challenge the constitutionality of the statute.

Does this mean the end for California taxpayers?  No, it does not.

New York enacted a similar statute in 2014 and clever estate planners have continued to create NY state income tax saving trusts.  Just not ING Trusts!

The key is to complete the gift.  No more incomplete gift trusts.

Move Out of California

One obvious option is to pick up a leave!  Move to another state where there are no state income taxes or where the laws allow ING Trusts to save state income taxes.

This will likely happen.  History tells us that tax increases (and in this case taking away tax savings opportunities) drive residents to move out.  At some point, they simply can’t take the high taxes.

The ocean is much, much warmer in Florida than it is in California!

Completed Gift Non-Grantor Trusts

If you like your home and you don’t want to move (or your kids will never speak to you again if you move!), current planning involves creating one or more Completed Gift Non-Grantor Trusts.  Just like New York’s taxing statute, California’s anti-ING Trust taxing statute does not tax Completed Gift Non-Grantor Trusts.

There are multiple alternative Completed Gift Non-Grantor Trusts.  Here, just as with an ING Trust, the client must be willing to give up some control.

• 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, 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.  Unlike an ING Trust, it only requires any one single adverse party signature.  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.  Unlike an ING Trust, it only requires any one single adverse party signature.  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 Trust 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.

Life Goes On

The world hasn’t ended.  There are still plenty of alternatives.  As estate planners, we all have to be aware of these alternatives.  It is also imperative that financial advisors, accountants, and trust officers brush up on this planning.

Stay ahead of the curve and be great for your clients.  There are millions of dollars to be saved!

RELATED EDUCATION

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
• Fear Factor: “Protecting Assets by Getting into the Creditor’s Head and Controlling His Mind”
• 2023 Trust Decanting Update
• Fixing Old “B” Trusts
• Trust Situs After Kaestner: Saving State Income Taxes Using Non-Grantor Trusts
• The NING Trust: Saving Significant State Income Taxes for Your Clients in High State Income Tax Jurisdictions
• DINGs and NINGs: Technical and Planning Issues
• 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 was 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 or at soshins@oshins.com or at his firm’s website, www.oshins.com.