How the New $40,000 SALT Deduction Cap Adjusts Our Thinking
By Steven J. Oshins, Esq., AEP (Distinguished)
Let’s talk about how the new $40,000 SALT deduction cap adjusts our thinking.
$10,000 Versus $40,000
$10,000 wasn’t enough to consider setting up multiple non-grantor trusts to “stack” SALT deductions. $40,000 per trust is a game-changer. This can be illustrated with examples to show just how powerful this planning can be.
Example 1: Client has $1,000,000 of annual income. Client sets up a NING Trust (Nevada Incomplete Non-Grantor Trust) and transfers assets producing $500,000 of annual income into the NING Trust. This creates two $40,000 SALT deductions. Client otherwise had too much income and would have been phased out because Client’s income exceeds the $500,000 cap before the SALT deduction cap begins its phase-out. So Client gets a +$30K deduction and the NING Trust gets a +$40K deduction for a combined +$70K in addition to the $10K that Client would have gotten with no planning. Therefore, the total annual SALT deductions = $80K.
Example 2: Client has four children. Client sets up a separate non-grantor gift trust for each child. That’s 4 * $40K = $160K of annual SALT deduction in addition to the Client’s own SALT deduction.
Example 3: Client has an existing gift trust (grantor or non-grantor) set up for Client’s descendants. Distribution trustee decants it into separate non-grantor gift trusts, one per child, to “stack” $40K SALT deductions.
Some Additional Comments
1. Don’t forget that setting the non-grantor trusts up in a jurisdiction with no state income tax by avoiding a resident trustee and/or local administration generally avoids the state income tax on non-sourced taxable income (depending upon the settlor’s state residence). This is better planning than SALT deduction planning. You should have already been doing this. This is the most important comment here by far!!!
2. For residents of states that tax trusts based on residency of the settlor, we used to just tell them there was nothing we could do to save state income taxes. But now there is! These states include Maine, Maryland, Michigan, Minnesota (but see Fielding case), Missouri (+ resident beneficiary), Nebraska, Ohio (+ resident beneficiary), Oklahoma, Pennsylvania Rhode Island (+ resident beneficiary), Vermont, Virginia, Washington, D.C., West Virginia, Wisconsin). This changes our opportunities for residents of these states.
3. The $15 million estate tax exemption ($30 million for a married couple) means that most people should be shifting their planning to income tax planning.
4. This planning will work for residents of states with a high state income tax, and it will also work for residents of states with no state income tax who have sourced income in states with a state income tax.
5. Also, make sure to distribute some taxable income out to lower tax bracket beneficiaries to “bracket arbitrage” and/or keep the trust’s taxable income within $500K to avoid the phase-out.
ABOUT THE AUTHOR
Steven J. Oshins, 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, 2022, 2024 and 2026. He can be reached at 702-341-6000, ext. 2 or [email protected]. His law firm’s website is www.oshins.com.