High-income earners continue migrating to low or no-income-tax states like Florida and Texas—a particularly strategic move for those planning to sell a business. For wealthy entrepreneurs not yet ready to relocate, tax savings are still possible with skilled legal help.
By setting up a specific type of trust, business owners can leverage favorable tax laws in other states. Instead of selling their business outright, they transfer shares to an “incomplete non-grantor” (ING) trust in a tax-friendly state like Nevada. When these shares are sold, the trust collects proceeds without incurring state income or capital-gains taxes, allowing the assets to grow tax-free and remain protected from creditors.
Dan Griffith of Huntington Bank anticipates ING trusts will surge in popularity as the volume of deals picks up, coinciding with a “silver tsunami” of baby-boomer business owners transitioning their companies. “With more deals comes more need for tax-saving strategies,” said Griffith, Huntington’s director of wealth strategy.
Investors can also benefit from ING trusts, allowing their portfolios to grow without state taxes on dividends. ING trusts are effective enough as tax-avoidance tools that states like New York and California have enacted laws to prevent their use by state residents. California closed this loophole in 2023, projecting an additional $30 million in tax revenue that year and $17 million annually thereafter.
Setting up ING trusts can be complex due to varied state regulations, but Bank of America’s Timothy Herbst notes it can still be worthwhile even in states without extremely high tax rates. “That trust can grow without any state income tax,” said Herbst, adding that this can represent substantial savings over decades.
How ING Trusts Work
Popular options for establishing ING trusts include Nevada (NING) and Delaware (DING), though Wyoming and South Dakota are also used since they don’t tax trust income or capital gains, and they offer creditor protection for trust assets.
A trust’s creator (or settlor) doesn’t need to live in the chosen state, but the trust must be managed by a third party within that state. While ING trusts are subject to federal capital gains taxes, many of the ultra-wealthy setting up INGs would likely face those taxes regardless. High earners in the top 37% tax bracket, such as centimillionaires, find ING trusts beneficial.
INGs can also be used to capitalize on a tax provision that exempts up to $10 million in profits from federal capital-gains tax for early shareholders. Nevada attorney Steve Oshins notes that an ING trust can even allow founders to double this exemption. “This trust can act as a second taxpayer, allowing a second $10 million exemption,” he explained, applicable even to those living in states without income taxes.
To comply with state laws, an ING trust must include multiple beneficiaries beyond just the settlor and their spouse. Beneficiaries, however, are subject to state income taxes on any distributions they receive. As a result, attorneys often advise clients to limit distributions to maximize growth within the trust, ideally leaving it for their children or future generations.
“It’s better for clients to understand that they likely won’t receive distributions back for themselves or their spouse,” said Herbst. However, exceptions can be made for financial necessity or if the client relocates to a low-tax state, Oshins added.
Key Considerations
ING trusts don’t defer taxes on state-specific income, like salaries or rental income generated in the state. For example, Griffith explains that an Ohio resident can’t avoid state taxes on rental income in Ohio by placing the properties in an ING trust in South Dakota.
In states with aggressive tax enforcement, Griffith advises clients to reduce their active involvement in the business and accept only minimal salaries before moving interests into the ING trust. “What you want to do is become essentially just a shareholder, receiving dividends,” he explained. “In many states, this reclassifies income as non-source.”
Setting up an ING trust is complex and requires precise planning to avoid triggering estate taxes while retaining income tax benefits. Navigating the tax codes of both the home and tax-haven state, the settlor must relinquish specific rights while keeping others, such as the ability to name beneficiaries upon death.
“You need a significant transaction for the benefits to outweigh the complexities,” said Griffith, noting that timing is crucial. Ideally, an ING trust should be in place well before a business is sold. Griffith recommends setting up the trust at least a year prior to any sale, which is often challenging for clients.
“They hesitate, wanting certainty of sale before funding the trust,” he explained. “But advance planning makes the difference—those cases tend to be the most successful.”