The expanded transfer tax exemptions created by the 2017 tax reform legislation will end in 2026. However, in the meantime, the increased exemptions have led many high-net worth individuals and couples to review their existing estate plans. The ING trust has now become a valuable tool and could easily become the biggest trend in 2019 estate planning.
Think Advisor’s recent article, “ING Trusts: The Hot Trend in HNW Estate Planning,” explains that because of the changes from the tax reform, ING trusts have taken on new significance. ING trusts can generate significant savings, both in income taxes and in overall transfer (gift, GST and estate) taxes. This means that it can be a good idea to look into an ING trust.
An ING trust is an intentionally non-grantor trust (or an irrevocable non-grantor trust) that’s primarily aimed to generate income tax savings. However, it can also have value in estate planning, because of the temporary nature of the greater estate tax exemption. The ING trust strategy has an “adverse party”—or a group of adverse parties—who control trust distributions to beneficiaries. Adverse parties can include adult children, although a committee format is generally recommended, in order to provide additional evidence that the IRS will regard the trust as a non-grantor trust.
In many states, ING trusts are either subject to reduced income tax rates, or are not subject to state income tax at all. Gifts to the trust can be either incomplete, allowing the trust creator to retain a degree of control over the assets and avoid gift taxes, or complete. That means that the transfer would create a deduction from the client’s lifetime transfer tax exemption amount.
Both the proposed and final Section 199A regs throw a wrench in many non-grantor trust strategies, by adding a new provision that requires aggregation of two or more trusts in certain situations. The aggregation rules apply in the Section 199A context and beyond. Therefore, they’re also relevant for those planning to use ING trusts to avoid the SALT (state and local tax deduction) cap.
Aggregation is generally required, if the trusts have substantially the same grantor or grantors, and substantially the same beneficiary or beneficiaries, if the principal purpose of forming the trust or contributing additional assets to the trust is to avoid income tax. Therefore, for income tax planning purposes, ING trusts will be most valuable to those who have multiple natural beneficiaries who can each serve as beneficiary of one trust, or for individuals who can justifiably point to a significant non-tax reason for the trust formation. Significant non-tax reasons that would promote the likelihood of the IRS respecting the separate ING trusts, often include aggregation of ownership within the family, savings generated by centralized asset management, avoidance of repetitive asset transfers within the family, asset protection or to relieve a transferring family member of asset management burdens.
The ING trust is complicated and there are significant implications for other parts of an estate plan. For that reason, you’ll want to speak with an experienced estate planning attorney in Houston to be sure that the ING does not have a negative impact on the overall estate plan.