At a Glance
Main Takeaway
California Governor Gavin Newsom is targeting certain state residents who have set up an Incomplete Non-Grantor Gift Trust (ING Trust) in a state without an income tax to avoid paying taxes in California.
Under Governor Newsom’s proposed 2023-2024 state budget, released on January 10, 2023, the income of an ING Trust may be subject to income tax as of January 1, 2023, if its settlor resides in the State of California. This applies to trusts with California-sourced income, a fiduciary residing in California, or a non-contingent beneficiary living in California.
Next Step
Read more to learn how this may impact wealthy Californians and how Windes Estate & Trust tax professionals can assist with options and other potential tax-saving strategies.
Many ING Trusts are set up by wealthy people in states without an income tax, such as Delaware, Nevada, South Dakota, and Wyoming. Wealthy individuals set up these trusts for various reasons, typically to protect their assets so they can be passed to children and grandchildren. They may have also reached the federal lifetime gift limit, making incomplete gift non-grantor trusts a viable tax-saving option.
State tax benefits are not the only reason ING Trusts are created. ING Trusts also have added privacy protections and allow grantors to maintain specific limited control over distributions. Alternatively, they may require that the trust’s assets be used in a specific way after their deaths. For example, they may specify that the money can only be used for beneficiary health, education, maintenance, and support.
Approximately 1,500 Californians have set up ING Trusts in another state that does not have state income taxes. If Newsom’s proposal is enacted, it is estimated the new levy would yield a revenue gain of only $30 million in the first year and about half of that in subsequent years. The law would also end this tax planning strategy that wealthy Californians have used for the last 20 years. The only other state with similar legislation is New York.
The Newsom proposal differs from the New York model and the FTB’s 2020 proposal to follow New York, requiring a January 1, 2023, effective date. Such retroactive legislation may raise potential constitutional scrutiny, face significant legal challenges, and strong opposition in the form of prejudicial implications it imposes on taxpayer financial planning. Whether or not the proposal passes into California law, it is expected to bring significant legislative disputes.
California taxpayers with questions about the impact of the Newsom budget proposal may contact Windes to discuss options and other potential tax-saving strategies.
