Thanks to a new law made retroactively effective to January 1, 2023, NINGs, DINGs, and other such things are no longer California state tax avoidance options.

On July 10, 2023, Governor Gavin Newsom signed into law Senate Bill 131. The law adds a new section – 17082 – to the California tax code that includes provisions that eliminate the tax benefits of Nevada Incomplete Gift Non-grantor Trusts (NINGs), Delaware Incomplete Gift Non-grantor Trusts (DINGs), and Incomplete Gift Non-grantor Trusts (INGs) in general.

Before getting into the terms of the new statute, let’s discuss what these trusts are, what they do, who used them in the past, and why they made sense for certain individuals.

Making the move to avoid high income taxes

The simplest and most common way to avoid a state’s high income tax is to move to another state. For example, relocating from California to Nevada saves a whopping 13% income tax rate every year.

Of course, there are those who wish to have their cake and eat it, too – they want to continue to reside in California but pay Nevada’s much lower taxes. For these taxpayers, the Incomplete Gift Non-Grantor Trust had been the solution. These trusts allow individuals to move their assets to Nevada without having to give up the cash or relocate.

Here’s how it works: Typically, a gift puts total ownership of an asset – including the tax liability for income earned on that asset – in the hands of the recipient. The Internal Revenue Code allows for the creation of trusts that can partition the ownership and tax liability. An intentionally defective grantor trust completes the gift of ownership but leaves the income tax liability with the grantor (the trust creator). An Incomplete Gift Non-Grantor Trust does just the opposite: the gifted asset remains in the estate of the grantor but the income tax liability on assets “transferred” to the trust is then the responsibility of the trustee.

In the past, high-net-worth or ultra-high-net-worth California taxpayers who wished to reduce the state income tax liability on their portfolio simply consulted legal and tax counsel and created a NING trust. The taxpayer then transferred the portfolio to the NING, which had a Nevada trustee and operated under Nevada law, which meant the assets held in the NING were subject to Nevada state income tax (read: none).  However, the NING assets never left the estate of the grantor, so there was no gift or gift tax liability and the assets of the NING received a step-up in basis upon the grantor’s death.

SB131 puts an end to all that

With the passage of SB131, that strategy is a thing of the past. Per the new tax code section, “For taxable years beginning on or after January 1, 2023, the income of an incomplete gift non-grantor trust shall be included in a qualified taxpayer’s gross income to the extent the income of the trust would be taken into account in computing the qualified taxpayer’s taxable income if the trust in its entirety were treated as a grantor trust.”  In simple terms, this means that the NING trust income will now be attributed back to the grantor.

Although the new law does include some exceptions, they are quite onerous and eliminate the income tax benefits sought by the creation of the trust in the first place.

Financial professionals working with investors who have accounts titled in the name of a trust should reach out to let them know about the new California law and encourage them to consult their legal advisor to see what effect – if any – it has on them. And for those individuals who may be considering alternative methods of saving on state income taxes, a move to another state may be one of the few alternatives available.

The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a financial professional. Federal and state laws and regulations are complex and subject to change.  Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information.