Trusts and Estates

Ca. Trs. & Estates Quarterly 2016, Volume 22, Issue 4


By Justin T. Miller, Esq.,* and W. Martin Behn, Esq.**1


Individual taxpayers in California who own assets with significant unrealized gains or recurring ordinary income would love to find a planning strategy that allows them to retain the economic benefit of the assets while avoiding or minimizing the California state income tax arising from such assets. At first blush, an incomplete gift non-grantor trust ("ING") formed in a state such as Nevada, Delaware or Wyoming ? that is, a "NING," "DING," or "WING" ? appears to offer this solution. Arguably, an ING could eliminate California state income tax liability attributable to the sale of an asset ? up to a 13.3 percent tax savings2 ? while avoiding or deferring a gift for federal gift tax purposes, thus allowing the grantor to get all of his or her money back at a later date.3 While the ING strategy might work in California, there also is a chance it might not.

The Franchise Tax Board ("FTB") is looking into ING structures.4 The FTB has publicly stated: "We are aware of the trust instruments. We are actively monitoring them. We will evaluate the situation to determine the best course of action."5 While the California Legislature and the FTB have not yet provided additional guidance, this article discusses several arguments the FTB could use to subject the net income of INGs to taxation in California ? in which case the California grantors of those INGs may face an unpleasant surprise: back taxes, interest, and penalties.6

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