New California Law Attacks NINGs and DINGs By Faith H. Liveoak and Mark A. Ziemba California has closed the income tax “loophole” for out-ofstate incomplete gift non-grantor trusts (“INGs”). Previously, if not otherwise distributed to a California resident, income earned on assets held in an out-of-state ING would not be subject to California income tax, making this an attractive structure for income tax planning. However, under the newly enacted Cal. Rev. & Tax. Code Section 17082, the income of an ING is now included in the gross income of a Grantor of the ING, as if the ING was a Grantor Trust On July 10, 2023, California Governor Gavin Newsom signed into law S.B. 131, which included a provision targeting the California state income tax treatment of incomplete gift non-grantor trusts (“INGs”). Under the prior law, a Grantor who contributed property to an ING did not report the trust’s income on their California state income tax return, unless the Grantor received a distribution of distributable net income (“DNI”) from the ING. Under the newly enacted Cal. Rev. & Tax. Code Section 17082, the income of an ING is included in
gross income of a Grantor of the ING, as if the ING was a Grantor Trust. The new rules are retroactive to January 1, 2023. Incomplete Gift Non-Grantor Trusts: An ING is an incomplete gift non-grantor trust. Whether the trust is a NING or DING depends on whether they are established in Nevada (a “NING”) or Delaware (a “DING”). NINGs and DINGs were initially pitched to residents of high-income tax states, like California and New York, as a strategy for avoiding state income taxes. An ING is funded when a Grantor (also commonly referred to as a “Settlor” or “Trustor”) makes an incomplete gift1 to an irrevocable non-grantor trust in Nevada or Delaware, often with a Nevada or Delaware Corporate Trustee. Since the gift is “incomplete” the Grantor is not required to file a Federal Gift Tax Return, pay gift taxes, or use any of the Grantor’s Unified Credit. The assets transferred to the ING will still be included in the Grantor’s estate for estate tax purposes. A Grantor Trust is a trust wherein all of the Trust’s income is treated as income of the Grantor, and is reported on the Grantor’s individual federal and state income tax returns.2 As a “non-grantor” trust, the ING is a separate taxpayer, and, to the extent that income is not DNI that is distributed to a beneficiary in the tax year it is earned, the ING reports the trust’s income on its own federal income tax return. When an ING is formed in states that do not tax an irrevocable trust’s income (like Nevada and Delaware), the only income tax paid by the ING is federal income tax.3 Unless DNI is distributed
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