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

Are you a financial advisor? If so, you’re likely compensated in large part based on assets under management. Therefore, your interests are aligned with those of our clients. The better you do for them, the better you do for yourself.

THE STATE INCOME TAX DRAG

Just as it is frustrating for our clients in states with a state income tax to pay that tax on taxable dividends and capital gains, it must be nearly as frustrating for the financial advisor whose income is also adversely affected by this state income tax drag.

What if there was a type of trust that can be used to avoid state income taxes, wouldn’t this be “the greatest thing since sliced bread”?

THE NON-GRANTOR TRUST

There is such a trust. It’s called a non-grantor trust. The trust is drafted by the attorney such that no grantor trust power is violated. And key decisions must be made in order to work around the applicable state long-arm taxing statutes.

For those who are top 1% financial advisors or those who wish to become top 1% financial advisors, there are various non-grantor trust options available, including the following:

1. Incomplete Gift Non-Grantor Trust (“ING Trust”) – This is an irrevocable trust in which transfers to the trust are incomplete for gift tax purposes, but complete for income tax purposes. These trusts are generally set up in Nevada or Delaware, however they can be set up in any state that has a Domestic Asset Protection Trust statute and no state fiduciary income tax.
2. Non-Grantor Trust for Descendants – This is an irrevocable trust in which transfers to the trust are complete for gift tax and income tax purposes. These trusts should be set up in a state that has no state fiduciary income tax.
3. Non-Grantor Trust for Spouse and Descendants – This is an irrevocable trust in which transfers to the trust are complete for gift tax and income tax purposes. It is sometimes referred to as a SLANT. In order to make it a non-grantor trust, it must require an adverse party to approve a distribution to a beneficiary. These trusts should be set up in a state that has no state fiduciary income tax.
4. Non-Grantor Trust for Settlor, Settlor’s Spouse and Descendants – This is an irrevocable trust in which transfers to the trust are complete for gift tax and income tax purposes. In order to make it a non-grantor trust, it must require an adverse party to approve a distribution to a beneficiary. Since this trust must qualify as a Domestic Asset Protection Trust, it should be set up in a state that has a Domestic Asset Protection Trust statute. The state also should not have a state fiduciary income tax.

CONCLUSION

Whether it’s a brokerage portfolio or other asset producing income that isn’t sourced to the client’s home state, or a sale of a business or other asset, the state income tax drag is definitely a “drag”. We all would like to avoid it if possible. Fortunately, there is a way to avoid it by using a non-grantor trust that is designed to avoid the applicable state long-arm statutes.

The financial advisors are perhaps in the greatest position to spot opportunities to use this strategy. Why aren’t they all doing so? I suppose that is a topic for another article.

RELATED EDUCATION

If you found this article interesting, you might also be interested in these other educational programs and products by Steve Oshins:

• 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
• Advanced-Level Estate Planning Sales & Marketing Kits
• 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. Steve was also named one of the Top 100 Attorneys in Worth and is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates Lawyer of the Year in 2012, 2015 and 2018 and Tax Law Lawyer of the Year in 2016 and 2020.  He can be reached at 702-341-6000, ext. 2, at soshins@oshins.com or at his firm’s website, www.oshins.com.