PTI – Personal Tax Inversion

//PTI – Personal Tax Inversion
PTI – Personal Tax Inversion 2017-01-25T21:56:28+00:00

Avoid State Income Tax With A Personal Tax Inversion


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.

Keeping Control

Is there a way to keep enough control that you don’t get accused of gifting the assets and having to pay gift tax, but not retain so much control that you are responsible for state income tax? The answer is yes and the structure is an Incomplete Non-Grantor Trust in a state such as Nevada, Delaware or Alaska. The Incomplete Non-Grantor Trust – also referred to as NINGs or DINGs to reflect the state (Nevada and Delaware, respectively) in which the trust is located – is the solution because it walks that fine line of giving up just enough control but not too much.

An added benefit is that NINGs and DINGs not only provide tax minimization but also asset protection. Unlike the politicians who are wrestling with what to do about corporate tax inversions, one state has already made this strategy untenable. For example, earlier this year New York state, which was losing an estimated $150 million a year through tax avoidance, effectively closed this tax loophole for New York residents. Other states may follow, but until then, if you expect a windfall from a one-time gain or an investment account that you anticipate to produce significant income over the coming years, a personal tax inversion vis-á-visa Nevada Incomplete Non-Grantor Trust (NING) or a Delaware Incomplete Non-Grantor Trust (DING) is certainly one strategy your financial advisor or tax team should be discussing with you.

Finally, regarding non-grantor trusts, they pay the top federal income tax bracket of 39.6% beginning at $12,150 of income for 2014. That is why a cost-benefit analysis (as well as looking at other goals such as asset protection and gift tax avoidance) is needed for individuals that are not already in the highest marginal tax bracket. However, for those that are, the NING will engender no additional cost.

Get Started with the Law Advisors USA Tax Elimination Strategies

Law Advisors USA will create a Tax Elimination Strategy specifically for you and help get you to Zero taxes.

Law Advisors USA has been in business since 1988 and have created hundreds of trusts and legal entities such as LLCs/S Corps/C corps. We are licensed to practice before the US Tax Court since 1992 and have extensive audit and tax experience dealing with business tax strategies and estate planning models.

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