These trusts may have funny-sounding names, but for some
high-net-worth individuals, they are serious tax-minimization tools. Known as
incomplete nongrantor trusts, they are often formed in Delaware, Nevada and
sometimes Wyoming, hence their acronyms “DING,” “NING” and “WING.” Those states
are chosen because they don’t tax the income of trusts established there, even
by people who live elsewhere, or have favorable tax rules.
In a typical scenario, an individual would put into the
trust an asset or assets that already have gone up a lot in value or that he or
she hopes will appreciate sharply, such as shares in a private company that plans
to go public. The aim is usually to sell the securities, at which point federal
tax would be due—but not state tax. Alternatively, the trust could be used to
hold assets that throw off a lot of income each year, sheltering that income
from state tax. At some point, the dollars in the trust would typically be
distributed to the person who created the trust and other beneficiaries.
Advisers say the strategy is especially in demand with
residents of California and New Jersey, where top marginal income-tax rates are
13.3% and 8.97%, respectively. One risk is that additional states could negate
the tax benefits for their residents.
To see the benefits of a DING or related trust, consider an
example from Suzanne Shier, the chief tax strategist at Northern Trust, of a
hypothetical individual who has a $10 million asset he originally acquired at a
$1 million cost basis. He wants to sell it, but lives in a state where the tax
If he puts the asset in a DING trust and then sells it, he
avoids a state-tax bill of $900,000. He would still owe $2,142,000 in federal
tax, assuming the top capital-gains rate of 20% plus the 3.8% surtax on net
investment income. The assets remaining after the federal tax bill was paid
would be $7,858,000 compared with $6,958,000 if it weren’t in a DING trust.
To pull this off, a little legal maneuvering is needed,
because the trust has to accomplish two things. It has to be designed so that
the individual gives up enough control of the asset to not be considered an
owner under federal income-tax rules; that nonowner status is indicated by
“nongrantor.” But the individual must retain enough control of the asset so as
not to trigger gift taxes.
A gift is considered “incomplete” if the person giving it
retains some level of control. With a DING, NING or WING, the individual
usually sits on a committee of beneficiaries that has the power to change or
direct the distribution of the assets, including making distributions back to
him or herself.
Advisers say people contemplating the creation of such
trusts should think about timing. If an asset put into a trust is immediately
sold and the money distributed back to the person forming it, that is likely to
raise red flags with state tax authorities as a sham. But setting up a trust,
selling the assets a few years down the road and then distributing them some
time after that is less likely to raise negative attention, especially if the
person obtains a private-letter ruling from the IRS.
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