Incomplete Gift Non Grantor Trust (ING Trust)

I.R.C. § 671 through § 679

What is an ING Trust?

An Incomplete Gift Non-Grantor Trust (ING trust) is a type of irrevocable trust used in estate planning to transfer assets to beneficiaries while allowing the grantor (the person creating the trust) to retain certain powers and benefits over the trust assets. The term “incomplete gift” refers to the fact that the transfer of assets to the trust is not considered a completed gift for tax purposes, which can have important implications for both the grantor and the beneficiaries.

ING Trust Terms:

Incomplete Gift: The term “incomplete gift” refers to the fact that the trust assets are not completely out of the grantor’s control and thus are not subject to gift tax at the time of transfer. Typically, the grantor retains certain powers over the trust that prevent the transfer from being a completed gift for tax purposes.

Non-Grantor: The trust is considered “non-grantor” for income tax purposes, which means that the trust itself is responsible for paying taxes on any income it generates. This differs from a grantor trust, where the income of the trust is taxed to the grantor regardless of whether the income is distributed.

Here are Some Key Features and Characteristics of an ING Trust:

1. Irrevocable: An ING trust is typically irrevocable, meaning that once the assets are transferred into the trust, the grantor cannot change or revoke the trust without the consent of the beneficiaries.

2. Retained Powers: The grantor retains certain powers over the trust, such as the ability to reacquire the trust assets or change the beneficiaries. These retained powers can vary depending on the specific terms of the trust, but they generally make the gift incomplete for tax purposes.

3. Gift Tax Implications: Because the transfer of assets to an ING trust is considered incomplete for gift tax purposes, the grantor may not be required to pay gift taxes on the assets transferred. However, this also means that the assets remain in the grantor’s estate for estate tax purposes.

4. Income Tax Implications: ING trusts are typically structured as grantor trusts for income tax purposes, meaning that the grantor is responsible for paying income taxes on the trust’s income. This can provide tax advantages for the grantor while the assets are held in the trust.

5. Benefit to Beneficiaries: The primary purpose of an ING trust is to benefit the trust’s beneficiaries, who will eventually receive the trust assets. The grantor can establish rules and guidelines for how the trust assets are to be distributed to the beneficiaries.

6. Asset Protection: ING trusts can also provide asset protection benefits, as the trust assets are generally shielded from creditors and may not be considered marital property in the event of a divorce.

ING Trust Background Information:

California Governor Gavin Newsome (D) on July 10 signed legislation (Senate Bill 131) that codifies in Section 4, California’s treatment of incomplete gift non-grantor trusts (INGs) for state income tax purposes. Effective retroactive to January 1, 2023, California will treat INGs as grantor trusts for state income tax purposes. Senate Bill 131 added Section 17082 to the California Revenue and Taxation Code providing that California residents who transferred assets into an ING will be treated as owners of the ING for California income tax purposes and will be liable for California income tax on any taxable income earned by the ING.

Note: The new California law, which was modeled after a New York law that took effect in 2014, does not affect an ING’s federal income tax treatment. To the extent an ING is considered a non-grantor trust for federal income tax issues, there can be mismatch issues with California.

Action item: Taxpayers interested in forming an ING should be aware that although New York and California are the only two states with laws specifically targeting INGs, other states have statutes that make it difficult to claim the intended benefits of an ING. Before considering such a trust, taxpayers should consult with their tax advisor to evaluate potential treatment in particular states.


The Takeaway:

The ING trust can be beneficial for individuals who live in states with high income taxes because the trust is set up in a state with no state income tax. The trust, not being a grantor trust, pays its own taxes and does not pass the income tax liability to the grantor. As such, the ING trust can potentially avoid state income tax that the grantor would otherwise have to pay.

However, the IRS and various state tax agencies scrutinize these trusts closely, and the regulations governing them can be complex and subject to change. It’s important to ensure that these trusts are structured correctly to comply with all tax rules and regulations. Due to the complexity of these instruments, individuals considering an ING trust should work with knowledgeable tax attorneys or estate planners who are experienced in this area.