Incomplete Gift Non-Grantor Trusts

For high-net-worth individuals residing in states with significant income tax burdens, watching tens or even hundreds of thousands of dollars disappear to state taxes each year can be particularly painful. According to recent 2025 data, states like California and New York have become increasingly aggressive in targeting trust strategies, with California treating ING trusts as grantor trusts for state income tax purposes as of 2023. Despite these challenges, properly structured Incomplete Gift Non-Grantor (ING) trusts remain one of the most powerful tools for legitimate state income tax minimization, especially when facing large capital gains events.

The urgency for implementing ING trust strategies has intensified with the anticipated sunset of high gift and estate tax exemptions. The lifetime exemption is scheduled to drop from $13.99 million per person in 2025 to approximately $7 million on January 1, 2026, making the window for advanced trust planning increasingly narrow.

Strategy Overview

An Incomplete Gift Non-Grantor Trust (ING) combines the best of both worlds in trust planning: it allows you to transfer assets to a trust without triggering federal gift tax (because the gift is "incomplete"), while simultaneously creating a separate taxpayer that can be located in a state with no or low income tax. This dual characteristic enables significant state income tax savings while maintaining flexibility and control over trust assets.

The strategy works by carefully structuring the trust to retain just enough control to make the transfer incomplete for gift tax purposes (typically through a limited power of appointment), while ensuring the trust qualifies as a non-grantor trust for income tax purposes. The trust then becomes its own taxpayer, filing Form 1041 in a favorable jurisdiction like Nevada, Delaware, or Wyoming.

Interactive Calculator: See Your Potential Savings

Use our calculator below to see how much you could save with this strategy:

Frequently Asked Questions

How do ING trusts achieve state income tax savings without federal gift tax consequences?

The magic of ING trusts lies in their careful balance of control and separation. By retaining a limited power of appointment over trust assets, you maintain enough control to make the transfer "incomplete" for federal gift tax purposes. This means no gift tax is due when funding the trust, preserving your lifetime exemption.

Current Data: According to 2025 IRS regulations, trusts reach the highest federal income tax bracket (37%) at just $15,200 of taxable income, compared to $693,751 for married filing jointly. (Source: IRS Revenue Procedure 2024-40)

Key Points:

• The trust must be administered in a state with no income tax (Nevada, Wyoming, Alaska, Delaware, or New Hampshire)
• A distribution committee of adverse parties (other beneficiaries) must approve distributions to maintain non-grantor status
• The trust files its own tax return (Form 1041) in the favorable jurisdiction

Example Scenarios:

• California resident with $5 million capital gain: Save up to $650,000 in state taxes (13% CA rate)
• New York resident with $2 million in annual investment income: Save $180,000+ annually
• Business owner selling company for $10 million: Potential savings exceeding $1 million

What are the risks and recent legislative changes affecting ING trusts?

The landscape for ING trusts has shifted significantly, with states becoming more aggressive in protecting their tax revenue. California's 2023 legislation now treats ING trusts as grantor trusts for state income tax purposes, effectively eliminating their benefits for California residents. New York has similarly strict recognition rules.

Expert Insight: "The key to successful ING trust planning in 2025 is establishing the trust well before any liquidity event and ensuring robust connections to the favorable state jurisdiction," notes trust planning experts.

Implementation Steps:

1. Engage experienced trust counsel familiar with both federal and state-specific rules
2. Select appropriate jurisdiction and establish trust with institutional trustee
3. Fund trust at least 6-12 months before anticipated income recognition events

How do distribution committees work and why are they critical?

Distribution committees are the linchpin of maintaining non-grantor trust status while preserving access to trust assets. Without proper structuring, the IRS could recharacterize the trust as a grantor trust, eliminating all state tax benefits.

Comparison Table:

What assets are best suited for ING trust funding?

Advanced planning focuses on funding ING trusts with assets poised for significant appreciation or income generation. Recent data shows the most effective use cases involve pre-liquidity event planning.

Advanced Techniques:

• Pre-IPO Stock: Transfer founders' shares before public offering
• Real Estate: Place properties before major development or sale
• Business Interests: Move ownership before strategic exit

What are the common mistakes and audit triggers to avoid?

Based on recent IRS guidance and state enforcement actions, several pitfalls can undermine ING trust effectiveness or trigger unwanted scrutiny.

Red Flags to Avoid:

1. Funding the trust immediately before a sale (establish at least 6-12 months prior)
2. Maintaining too much control through distribution provisions (risks grantor trust treatment)
3. Insufficient connections to the favorable state (use institutional trustee, hold trust meetings there)

Implementation Timeline

Week 1-2: Initial Planning and Jurisdiction Selection

• Consult with specialized trust attorney and CPA
• Analyze current state tax exposure and potential savings
• Select optimal trust jurisdiction based on your specific circumstances
• Review asset portfolio for funding opportunities

Week 3-4: Trust Design and Documentation

• Draft trust agreement with proper incomplete gift provisions
• Establish distribution committee structure with adverse parties
• Ensure non-grantor trust requirements are met
• Coordinate with institutional trustee in selected jurisdiction

Week 5-8: Funding and Implementation

• Obtain necessary valuations for assets to be transferred
• Execute trust agreement and establish trust accounts
• Transfer initial assets to trust
• File any required state notifications or registrations

Week 9-12: Ongoing Compliance and Optimization

• Establish trust accounting and tax compliance procedures
• Implement investment strategy within trust
• Monitor for legislative changes in relevant jurisdictions
• Plan for future funding opportunities

Optimization Strategies

Multi-State Planning Considerations

• Residency Planning: Consider changing personal residency to complement trust strategy
• Source Income Analysis: Structure investments to minimize source-state taxation
• Interstate Coordination: Leverage differences between state tax rules

Trust Design Enhancements

• Directed Trust Provisions: Separate investment and distribution decisions
• Trust Protector Roles: Add flexibility for responding to law changes
• Decanting Powers: Build in ability to move trust if laws change

Integration with Estate Planning

• Generation-Skipping Planning: Leverage trust for multi-generational wealth transfer
• Charitable Provisions: California exception for 90% charitable distribution
• Dynasty Trust Features: Combine with long-term estate planning goals

Advanced Strategies

Pre-Transaction Planning for Business Sales

For business owners anticipating a liquidity event, timing is critical. Establishing and funding an ING trust well in advance of negotiations can save millions in state taxes. The trust must have economic substance and genuine business purpose beyond tax avoidance.

Investment Income Optimization

High-net-worth investors can use ING trusts to shelter ongoing investment income from state taxation. This is particularly effective for alternative investments, hedge fund allocations, and private equity that generate significant ordinary income.

Multi-Generational Wealth Planning

ING trusts can be structured as dynasty trusts in favorable jurisdictions, combining state income tax savings with long-term estate planning benefits. This approach leverages both current tax savings and future transfer tax minimization.

Ready to implement this strategy? Slim Tax can help you create a personalized implementation plan and track your progress.

Disclaimer: This strategy guide provides general tax information based on current regulations. Consult with a qualified tax professional for advice specific to your situation.