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Trusts as a tool for reducing estate taxes

On Behalf of | Jul 10, 2019 | Estate Tax

Estate taxes in California can be on the high side, amounting to as much as 13%. Reducing estate taxes is a goal of many people, and they will go to extraordinary lengths to accomplish it. This includes even moving out of state prior to an expected increase in income from an event, such as the sale of a company. A recent Supreme Court decision may provide another way.

A Supreme Court decision involving another state could have implications for reducing estate taxes in California. A woman in another state was the designated beneficiary of a trust known as an Incomplete Gift Non-Grantor trust. The trust, once established, is administered by an independent trustee, and the grantor can remain involved with the trust but is not the owner. The state in question attempted to tax a beneficiary, a daughter, who had received no distributions; she also had no control over the trust and did not know when or if she would receive distribution. The court ruled the state could not tax her based solely on her location.

These trust are typically set up in states with lower tax rates, such as Nevada and Delaware. The idea behind them is that the funds are not taxed until distribution. At that time, the beneficiary may no longer be a resident of the high-tax state, nor can the trustee be a resident of the high-tax state.

Creative trusts, which includes the Incomplete Non-Grantor Trust, can be worthwhile when considering strategies for reducing estate taxes in California. Blending federal and state tax strategies can also be worthwhile but should not be undertaken lightly. When contemplating estate planning strategies, a consultation with an estate planning professional could prove worth the effort in the long run.


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