As of 2022, Colorado features a 4.40% state income tax rate. According to the Tax Foundation, state income tax rates throughout the nation can run as high as 13.30% in California, or as low as 0% in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. Some states are known for promoting favorable asset protection laws designed to attract wealthy families and individuals from across the country and the world.
Nevada is one such state looking for innovative ways to help families and individuals protect and save their wealth. One such method and tool that Nevada has introduced is the Nevada Incomplete Non-Grantor Trust (NING). NINGs are not a one size fits all solution to addressing state income tax issues but can be highly advantageous in certain circumstances.
What is a NING?
A NING is a trust in which income is placed to be paid out to beneficiaries living in a state with no income tax or an income tax with lower rates. In order to avoid state income tax, the trust must not be categorized as a “grantor trust” under the income tax laws of the state in which the settlor resides. Further, to avoid any federal gift tax issues, trust contributions must not be treated as gifts for federal gift tax purposes. Transfers that are not gifts are often referred to as “incomplete gifts.”
For an Incomplete Non-Grantor Trust (ING) to work effectively, the assets must be legally located in a state that has no income tax, the settlor must not be the only beneficiary, and all distributions from the trust must be approved by a distributing committee that consists of at least the settlor and two other beneficiaries. The distribution trustee must at all times be comprised of sufficient members to avoid giving any member of the committee unilateral power to benefit themselves. As Nevada has no income tax, it is a prime state to locate an ING, making NINGs an attractive option for many people looking to protect their wealth.
Limitations of NINGs
While there are many advantages associated with NINGs, it does not fit every situation or circumstance. NINGs do not avoid all taxes or allow a settlor to retain control or to receive a guaranteed consistent income. NINGs are probably not the best fit for individuals living in states with no income tax, individuals requiring regular income distributions, or someone unwilling to take the chance that Nevada state tax laws may shift to allow for income tax to apply to NINGs.
Applying NINGs to Colorado Income
Deployed properly, NINGs represent a significant savings and wealth protection opportunity for interested families and individuals in Colorado. Due to the 4.40% state income tax rate in Colorado, $500,000 of income would see approximately $21,448 lost to Colorado income tax alone. Subsequently, each $500,000 NING would result in roughly $21,448 saved for an individual from Colorado. Drafting a NING Trust is a complex process that should be undertaken by an experienced attorney to ensure that the proper guidelines are followed, allowing the NING to be established as a non-grantor trust and shifting the tax liability.
Speak with a Boulder, Colorado, Estate Planning Attorney Today
Contact us for information about exploring NINGs to offset state income taxes. Braverman Law Group is here to help clients with benefits planning, estate planning, and many things in between. To schedule a free, no-obligation consultation with one of our trusted Boulder estate planning attorneys, give us a call today at (303) 800-1588.