Steve Oshins Releases 12th Annual Non-Grantor Trust State Income Tax Chart

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

I. The Tax Drag

Saving state income taxes is very popular with clients because of the immediate gratification inherent in saving taxes now rather than later. Anybody who has ever seen a computation of compound interest with even a small increase in the selected interest rate knows how valuable even a 1% difference is over the course of a number of years.

The “tax drag” is the amount by which investment returns are reduced due to taxes. The opportunity to move a non-grantor trust to a jurisdiction where state income tax can be avoided often makes a substantial impact on the value of the trust’s underlying assets. By avoiding the tax drag inherent in a trust that is subject to state income tax, the trust grows in value much faster.

This planning opportunity is very well known to many advisors, yet it appears to be underused by most and should be considered whenever any trust is being planned and created and whenever an advisor is reviewing an existing trust to look for opportunities to help the client.

II. $40,000 State and Local Tax Deduction (“SALT Deduction”)

The recently enacted expansion of the federal SALT deduction raises the cap from the long-standing $10,000 limit to a significantly more generous $40,000 beginning in 2025, with annual inflation adjustments built into the statute. This higher cap applies not only to individual taxpayers who itemize but also to non-grantor trusts, which are treated as separate taxpayers for federal income tax purposes. As a result, the new rules open the door to enhanced planning opportunities in high-tax states, particularly where multiple non-grantor trusts can each potentially claim their own SALT deduction. The legislative change is part of the broader “One Big Beautiful Act,” which specifically provides for the expanded cap and its inflation indexing.

However, the expanded deduction is not without limitations. The law introduces income-based phase-outs that begin at approximately $500,000 of modified adjusted gross income, reducing the benefit for higher-income taxpayers and, by extension, for non-grantor trusts with substantial taxable income. In practice, this means that while the $40,000 cap may appear generous, the effective deduction can shrink rapidly once the phase-out threshold is crossed, creating a steep benefit cliff. These phase-out mechanics apply uniformly across individuals and non-grantor trusts, making careful income-level management essential when designing trust structures intended to maximize SALT deductibility.

III. Trend over Past Year

Over the past year, many states’ top income tax rates were reduced because of a budget surplus. The reductions were generally very small though and therefore generally didn’t materially affect the planning opportunities to avoid or reduce these taxes.

The recent changes are as follows:

• Georgia reduced its top marginal rate from 5.19% to 5.09%.

• Indiana reduced its top marginal rate from 3.00% to 2.95%.

• Kentucky reduced its top marginal rate from 4.00% to 3.50%.

• Mississippi reduced its top marginal rate from 4.40% to 4.00%.

• Montana reduced its top marginal rate from 5.90% to 5.65%.

• Nebraska reduced its top marginal rate from 5.20% to 4.55%.

• North Carolina reduced its top marginal rate from 4.25% to 3.99%.

• Ohio reduced its top marginal rate from 3.125% to 2.75%.

• Oklahoma reduced its top marginal rate from 4.75% to 4.50%.

However, there are currently multiple states with proposals to raise state income taxes, create a wealth tax and/or raise other taxes. Therefore, we might see a reversal in trend this coming year.

IV. “Resident Trust” Definition

Different states have different rules as to what creates a “resident trust” that is subject to taxation in that state. States may tax a trust based on the residency of the settlor or testator, based on whether there is a resident trustee or beneficiary or whether there is administration in that state, or for a combination of these factors and/or other similar factors.

So it isn’t as easy as simply situsing a trust in a state with no state income tax. You have to look at the state taxing statutes that may apply.

V. The Chart as a Resource for Advisors

The Non-Grantor Trust State Income Tax Chart simplifies this analysis by summarizing each state’s taxing rules and providing a hyperlink to the applicable taxing statutes. The Chart was created not only to be a resource to practitioners and clients, but also to create opportunities for them.

One focus of this Chart is to determine whether a trust can be moved to another state to save state income tax. Another focus is to determine who to avoid using as trustees, in which states to avoid trust administration, as well as other variables that may unnecessarily cause a state income tax.

No trust should ever be created without the advisor knowing the residency of the settlor, the proposed trustees and the beneficiaries. This information is invaluable in the planning process since it can have a substantial influence on certain decision points.

Thus, each advisor should have a handy resource to use to quickly access the different state rules to be able to properly plan for their clients.

COMMENT:

I. The 12th Annual Non-Grantor Trust State Income Tax Chart

The Non-Grantor Trust State Income Tax Chart is a two-page summary of the non-grantor trust state income tax rules in all states and Washington, D.C. The states are listed in alphabetical order.

• Column 1 lists the name of the state.

• Column 2 lists the statute or other taxing authority showing what it takes to be treated as a resident trust. For those who access the online version, the statute or taxing authority is linked so that the end-user can easily access that authority to read the rules carefully. This feature will help those who were unsure how to spot the opportunity to very easily go directly to the source.

• Column 3 lists the highest tax rate for 2026 in that jurisdiction.

• Column 4 answers the question, “Under What Condition does the State Tax a Non-Grantor Trust?” It answers it in a very short summary fashion so the reader can quickly understand the gist of the statute or other taxing authority. There is a warning towards the bottom of each of the two pages not to rely on the short summary and to always read the statute.

II. Planning Opportunities

There are various planning 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 generally be set up in any state that has a Domestic Asset Protection Trust statute and no state fiduciary income tax.

2. Non-Grantor Gift 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 Gift 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 the settlor’s spouse. These trusts should be set up in a state that has no state fiduciary income tax.

4. Non-Grantor Gift 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 the settlor or settlor’s spouse. 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.

III. Conclusion

The 12th Annual Non-Grantor Trust State Income Tax Chart was recently updated to take into consider changes from the past year.

The Chart helps advisors create opportunities to save state income tax for their clients both with newly created non-grantor trusts and by moving and fixing any existing non-grantor trusts that are needlessly paying state income tax and therefore dragging down the trust’s asset base. The low state and local tax deduction limitation magnifies this problem, thereby bringing state income tax planning into the spotlight.

Advisors should be taking advantage of the opportunity to avoid the tax drag inherent in many trusts that accumulate income that is subject to state income tax even if not sourced to that state. In fact, it is somewhat shocking that this concept isn’t the most talked about concept among the financial planners whose assets under management are ratably affected by this tax drag.

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