If you lean more on the side of wanting to take advantage of all legally available options to reduce taxes, your wait is over.
We offer a strategy called a “personal tax inversion” to avoid paying large sums of money in state income taxes.
The basic issue is this. If you live in a state with an income tax – and especially if you live in a state with a high income tax such as California where the rate is as high as 13.3% — how can you avoid or reduce tax on income your assets produce? With a personal tax inversion, there is a way to shift assets to a state without any income tax. And just like the large U.S. based companies have done for years, you too can benefit from having your assets located in a new jurisdiction that assesses a lower – or in most cases – no state income tax. But unlike corporate tax inversions where a company has to shift headquarters to another country, a personal tax inversion simply shifts assets to a trust located in a different state within the United States. Let me explain.
There are grantor trusts and non-grantor trusts. A grantor trust is established by an individual called the grantor. With a grantor trust, the grantor (i.e., you) is treated as owning the trust assets for income tax purposes, and as such, is responsible for any income tax due on the assets within the trust. For example, if you live in California and set up a grantor trust in California or even in a state without income tax such as Nevada, because you live in California you are responsible for paying California state income tax on the income generated in the trust. So if our goal is to reduce state income taxes, a grantor trust isn’t going to work well.
In comparison, a non-grantor trust is where you place assets into the trust and give up enough tax strings so that you are no longer considered the “owner” for tax purposes.So now the trust itself and not you is responsible for paying the income tax. If the trust is administered in a tax-free state such as Nevada, the trust pays no state tax. Success! But there’s a problem. If you transfer assets outside of your control, you run the risk of having to pay gift taxes. So while you may avoid state income tax, you would most likely have to pay federal gift tax or at least use up your gift/estate tax exclusion if the drafting is done incorrectly.