Under current U.S. tax laws, transferring wealth at the time of your death often means that you will incur significant tax liabilities. Fortunately, the Internal Revenue Service considers the ownership of wealth differently when it is passed on using certain ownership rules that are described in Title 26 of the United States Code. This section of law forms the framework for taxation of income, gifts, estates, employment and more.
In some cases, tax planners can utilize some of the ownership rules set forth in Title 26 to help individuals achieve tax savings. For example, tax liabilities related to income taxes are different from those attached to gifts or estate taxes.
Throughout the years, tax planners have taken advantage of certain types of trusts that exploit these loopholes. One example is the Intentionally Defective Grantor Trust. With the formation of an IDGT, a wealthy family can offset certain tax liabilities during a transfer of assets onto another generation. Wealthy parents who form an IGDT can transfer wealth to their children for gift or estate tax purposes, yet retain the income tax liabilities associated with ownership of those funds.
Another type of that takes advantage of the Tax Code is the Incomplete Gift Non-Grantor Trust. This primarily works for wealthy parents who want to transfer a gift to their children, yet expect to incur significant tax liabilities. Under the ING trust scheme those parents can create a trust in which they are named as the beneficiaries. For example, the parents may be planning to sell off a major asset such as a business or a significant amount of stock. By establishing an IGN trust, those parents can effectively transfer ownership of that wealth to the IGN trust that is domiciled in a non-income tax paying state such as Nevada or Delaware.
If you are concerned about reducing your tax liabilities, you should know that tax law is extremely complicated. Your New York estate planning attorney can assist you by evaluating the circumstances of your particular situation and put together a strategy that works best for your needs.
Source: Forbes, “Might These Little-Known IRS-Recognized Trusts Save You Substantial Taxes?” Todd Ganos, Dec. 26, 2014