Estate planners in particular seem to love acronyms.  So what is a NING (aka WING or DING)? A NING is a Nevada Incomplete-gift Non-Grantor Trust.  It is an irrevocable trust where the trust is its own taxpayer (in contrast to most trusts that are formed as “grantor” trusts).  The Trust is taxed in the state where the trust is established instead of the state where the Grantor resides.  The transfer of assets to the NING is an incomplete gift for gift and estate purposes, therefore the assets going to the trust do not utilize the grantor’s lifetime gift exclusion and the assets could be used by (or distributed to) the grantor later.

Who would be interested in this type of trust? 

NINGs are beneficial for those living in states with high income tax.  Here’s an example:

Yoda lives in a state that imposes a 10% state income tax on income and capital gains.  Many years ago Yoda invented the light saber, a high-tech battle weapon preferred by Jedi knights.  Yoda is thinking of selling his patent rights to STARK, Inc., a weapons manufacturer.  Yoda thinks that the patent rights might be worth $10 million, and Yoda’s development costs for the light saber were minimal so Yoda’s estimated capital gain if he were to sell the patent would be $9.8 million.

Yoda could transfer the patent, an intangible asset, to a NING.  The NINGwould be established in Nevada and would be managed by a Corporate Trustee in Nevada.  Upon the Trustee’s sale of the patent to STARK, Inc., the gain on the sale for tax purposes would be recognized entirely by the Nevada Trust.  Federal income taxes on the capital gain would be reported and paid by the Trust on a Form 1041.  Using this structure Yoda has effectively avoided the additional state income tax on the capital gains because the trust is taxed as a Nevada entity and Nevada does not impose income tax on individuals or trusts.  Yoda may be the beneficiary of this trust and can receive distributions from the trust.

The popularity of these trusts soared in the early 2000’s after states like Delaware, Alaska, and Nevada passed self-settled spendthrift trust statutes.  Thereafter in 2001, the IRS issued numerous Private Letter Rulings beginning that set the ground work for the income tax and estate tax issues concerning these trusts.  The attractiveness of these trusts continued through 2007 until the IRS indicated that they were taking a new approach to the DING/WING/NING.

However, in 2013, the IRS issued a new Private Letter Ruling (PLR 201310002) that renewed the favor of the NING.  This PLR, based upon Nevada’s self-settled spendthrift trust statute (NRS 166), renewed interest in this type of planning.  There are many more details to this type of trust that are provided in the PLR and details of the Grantor’s state income tax laws and the Grantor’s specific situation must be carefully analyzed by counsel before moving forward.

To ensure compliance with IRS Circular 230, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing, or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.

A favorite estate planning transaction used by many sophisticated estate planning attorneys across the country involves the use of an “intentionally defective grantor trust” (IDGT).  The “grantor trust” rules of the Internal Revenue Code instruct that a grantor trust is not taxed as an entity separate from the grantor (the person creating the trust) and that the assets transferred to a grantor trust still belong to the grantor for income tax purposes.  The result of transferring assets to a trust that qualifies as a grantor trust is that the person has not made a transfer for income tax purposes.  Many estate planning attorneys use the grantor trust rules to their advantage and they carefully draft a trust that is “intentionally” drafted to qualify as a grantor trust for income tax purposes, yet the carefully drafted trust can also be treated as a completed transfer for the gift tax and estate tax.  Therefore by using an IDGT and transferring appreciated assets to a trust a person can shift the value of the asset from his or her taxable estate for estate tax purposes while at the same time the transfer will not count as a taxable transfer for income tax purposes that could trigger capital gains.

The Obama Administration’s revenue proposal for 2013 recommends a change to the long-standing grantor trust rules.  The proposal would require more consistent treatment of transfers to a grantor trust and would eliminate the powerful estate tax planning that can be accomplished using the IDGT.  The proposal would include assets in a grantor trust in the grantor’s taxable estate and would therefore take away the advantage described above.  The proposal does not purport to affect grantor retained annuity trusts, qualified personal residence trusts, and grantor retained income trusts.

It is possible that a grantor trust created and funded prior to a change in the law could be “grandfathered” into existing law.  This could bring some great advantage to someone willing to establish an IDGT under current law and fund that trust with sufficient assets this year in order to hedge against any possible changes to the law.

Luckily, this is only a proposed change in the law that is presented by the Department of the Treasury and hopefully this proposal will never make it into ourlegislative system.  We will be watching this topic carefully and we hope that the favorable laws that apply to IDGTs can continue on for many more of our clients and that the IDGT will not become an estate planning endangered species.