State Income Tax Planning for the Nonresident Floridian: The ING Trust

Florida is a great place to live because there’s no state income tax. Many people move here from other states and keep ties to their old state. Florida lawyers have to know about tax laws in other states to help their clients. Some people use a special kind of trust to avoid paying income tax in their old state. The ING trust is a way to save on state income taxes by setting up a special trust in a state that doesn’t tax trust income. This trust is structured so that it’s not subject to state income tax, which can save a lot of money. It’s a complicated legal concept, but the bottom line is that it can help people avoid paying state income tax on money they receive from the trust. The grantor trust rules rely on the powers retained by the person who sets up the trust. If certain powers are retained, the trust is considered grantor trust and can have tax consequences. ING trusts were set up to avoid this, using a “distribution committee” to make decisions about trust distributions, which made the trust not a grantor trust. The IRS approved this structure in several rulings between 2005 and 2007. The grantor created a trust and named a company in Delaware as the trustee. The trust allowed a group of two beneficiaries to decide when and how the trust’s money should be given out. The grantor also had the power to decide how the money should be used after they die. The IRS said that the grantor didn’t give away the money when they made the trust because they still had control over it. The IRS also said that the group of beneficiaries didn’t have the power to give away the money to themselves, so they wouldn’t have to pay taxes on it. The IRS looked at some previous decisions about how money in a family trust should be taxed when someone dies. They decided that in a particular case, the trust money should be included in the deceased person’s estate and subject to taxes. This is because the remaining trustees did not have full control over the trust after the person died. This decision was based on some specific rules in the tax law. In 2008, the IRS asked for public comments on a news release about trust laws. Many professional organizations said the rulings were wrong. In 2012, the IRS released new advice that changed the rules for trusts. This affected ING trust planning. In 2013, the IRS issued new rulings about trusts that included changes to the rules for how money can be used. In 2013, the IRS said that the person who set up the trust wouldn’t be considered the owner of any part of it, and that giving property to the trust wouldn’t be a completed gift. They also said that when the trust gives money to the person who set it up and other people, it wouldn’t count as a completed gift for the people in charge of giving out the money. But they didn’t say what happens if someone on the money-giving committee dies.

In 2014, the IRS finally settled these questions with new rulings. A person created a trust for their family, with a company as the trustee. While they were alive, they and their family members could decide how to use the money in the trust. After they died, the money would be given to whoever they named in their will or, if they didn’t have a will, to their spouse’s children. The IRS issued rulings about ING trusts, saying that they are valid and the grantor doesn’t have to pay gift taxes when putting property into the trust. They also said that the distribution committee members won’t be taxed when directing the trustee. This means that the trust structure is approved by the IRS. Some states are not happy about the IRS allowing ING trusts to avoid state income taxes. New York and California have enacted laws to prevent this. In New York, income from an ING trust is taxed as if it were a grantor trust, and in California, they have “throwback rules” to deal with ING trusts. Under California law, the tax status of a trust is determined by where the fiduciary (the person in charge of the trust) or beneficiary (the person who receives the trust’s income) lives, not where the person who created the trust lives. If the taxes on the trust’s income are not paid when they are due, they will be taxed when the income is actually given to the beneficiary. This also applies if the beneficiary’s interest in the trust was uncertain. Even if the trust adds its income to the principal instead of giving it to the beneficiary, the income is still taxable. The beneficiary will have to pay the tax for all the years the income was held in the trust, not just for the year they received it. California law allows out-of-state irrevocable trusts created by California residents to avoid immediate income tax if the interests of California residents are contingent. However, once income is distributed to a California resident, it becomes taxable. The trust can only avoid California income taxation if distributions are made to non-California residents. Additionally, states may use the Uniform Voidable Transaction Act to invalidate the trust and tax the income. Creating an ING trust can help avoid state income taxes in certain situations, but it’s not a guaranteed way to avoid paying taxes. It’s important to follow state laws and get advice from a professional before setting up an ING trust. There are some examples where the IRS has approved this type of trust, but it’s not a sure thing. Various legal organizations and professionals have written letters and given presentations about estate and gift tax laws to the IRS. The letters and presentations discuss different aspects of these tax laws and provide insight on how they should be interpreted and applied. The legal professionals involved are knowledgeable and experienced in estate planning and administration.

Source: https://www.floridabar.org/the-florida-bar-journal/state-income-tax-planning-for-the-nonresident-floridian-the-ing-trust/