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Monday, April 27, 2020

ESTATE PLANNING PITFALL

ESTATE PLANNING PITFALL

You’re setting up trusts in your home state

Suppose you’ve decided to include one or more trusts in your family’s estate plan. It’s only natural that you should create the trust in the state where you live, right? Wrong. Don’t assume that this is the best approach. For a variety of reasons, you may be better off taking the trust to a different jurisdiction.

For example, certain trust-friendly states may permit perpetual “dynasty trusts” that benefit many generations to come, while others allow “silent trusts” where the beneficiaries don’t have to be notified about their interests. Still others might offer greater flexibility relating to a trustee’s duties and powers than your home state does. But the reason most often cited for going out-of-state is taxes.

In particular, residents of high income tax states such as California, New York and New Jersey are flocking to states where there is no income tax at all. By doing so, you can take advantage of “self-settled trusts” where the grantor and the beneficiary are one and the same. If structured properly, the trust avoids being characterized as a grantor trust in which the income is taxable to the grantor by the state where he or she resides. And you don’t have to move out-of-state for this tax benefit.

Nevada, Wyoming and Delaware have become known as tax havens for these types of trusts. The applicable trusts are often referred to by the monikers of NINGs (Nevada Incomplete-gift Nongrantor Gift trusts), WINGs (Wyoming Incomplete-gift Nongrantor Gift trusts) and DINGs (Delaware Incomplete-gift Nongrantor Gift trusts), respectively.


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