ING trusts: How they work and their continued viability

In the context of trusts, CPAs may have heard someone mention WINGs, DINGs, or NINGs. This article aims to explain the advantages, requirements, and potential drawbacks of these trusts for estate planning purposes.

An ING trust is an incomplete gift nongrantor trust. (WINGs, DINGs, and NINGs are INGs designating the state under the laws of which they are established, respectively, Wyoming, Delaware, and Nevada.) The transfer to the trust is a completed transfer for income tax purposes leading to nongrantor tax treatment, but the transfer is incomplete for gift and estate tax purposes. In other words, an ING trust’s income is taxed separately from its grantor, but the assets transferred to the trust are still includible in the grantor’s estate.

The trust is structured as a complex trust rather than a simple trust, removing the requirement to distribute trust accounting income annually. The trust’s beneficiaries often include the usual persons, such as the grantor’s descendants, but the grantor may also be named as a beneficiary. Trust distributions are determined and approved by an independent trustee, a power–of–appointment committee typically composed of adverse parties such as beneficiaries of the trust, or some combination of the two. The grantor may also have limited control over trust distributions, such as the power to veto distributions to other beneficiaries. Ensuring that this decision–making framework is in place regarding distributions and that the grantor’s control is limited is key to maintaining nongrantor trust status.

What causes the gift to an ING trust to be incomplete for estate and gift tax purposes?

The Treasury regulations state that a gift may be considered incomplete if the grantor “reserves any power over its disposition,” whether for the grantor’s benefit or for the benefit of another.¹

While not an exhaustive list, commonly retained powers and rights causing incomplete gift treatment and/or estate tax inclusion include:

Estate tax inclusion

• The power to amend, alter, revoke, or terminate the trust.²
• The use, possession, right to income, or other enjoyment of the transferred property for any period that does not in fact end before death.³
• The right, either alone or in conjunction with any other person or persons, to designate the person or persons who shall possess or enjoy the transferred property or its income for any period that does not in fact end before death.⁴

Incomplete gift treatment

Though the above–listed powers and rights causing estate tax inclusion are relevant and should be noted, the powers listed below directly cause incomplete gift treatment and are the more commonly retained powers included in ING trust documents.

• Power of the donor to revest the beneficial title to the property in himself or herself.⁵
• Power to name new beneficiaries (unless the power is a fiduciary power limited by a fixed or ascertainable standard).⁶
• Power to change the interests of beneficiaries as to themselves (unless the power is a fiduciary power limited by a fixed or ascertainable standard).⁷
• Testamentary power to appoint the property in trust to any person or persons or entity other than the grantor’s estate, the grantor’s creditors, or the creditors of the grantor’s estate.⁸
• Power to consent to or veto distributions: While not directly specified in the Treasury regulations, this power is often found in ING trust agreements and is considered a retained power over the disposition of the transferred assets and allows the grantor to change the interest of the beneficiaries.⁹

Pursuant to Regs. Sec. 25.2511–2(e), a donor is considered to possess a power if it is exercisable by the donor in conjunction with any person who does not have a substantial adverse interest in the disposition of the transferred property or the income therefrom.

Planning opportunities and uses

The combination of nongrantor income tax status, along with incomplete gift transfer tax status, provides the potential for solutions to existing problems as well as many unique planning opportunities. Some of the key characteristics of ING trusts that allow them to be such useful planning vehicles are:

• The trust is treated as a separate taxpayer for federal income tax purposes.
• The trust is structured as a complex trust, meaning that absent any distributions, the income will be taxed to the trust.
• Since the transfer of assets to the trust is incomplete for gift and estate tax purposes, the grantor’s lifetime gift and estate tax exclusion will not be affected by the transfer.

State income tax minimization

State income tax planning opportunities may exist, depending on the grantor’s state of residence along with the trust’s state of domicile. Since the trust is treated as a separate taxpayer for income tax purposes, establishing domicile in a state with more taxpayer–friendly state income tax rules may be possible. For example, an individual taxpayer in a state with a high income tax rate may wish to shift income–producing assets to a state with a lower income tax rate or, perhaps, no income tax at all. An ING trust may be a vehicle that the taxpayer can use to accomplish this goal.

To illustrate, a grantor may choose to establish an ING trust in a state such as Nevada that does not have a state income tax, creating a NING trust, and transfer income–producing assets or assets to be sold in the future to this trust. If all is structured properly and the grantor’s state of residence allows for this, the trust, as a separate taxpaying entity in the state of Nevada, would not be subject to state income tax on its nondistributed, nonsourced income such as portfolio income.

Income specifically sourced to a state other than Nevada would still be taxable to that state, and distributions of nonsourced income to the grantor would likely be taxable in the grantor’s state of residence.

Distributions back to the settlor

Since an ING trust is structured as an incomplete gift, distributions of income and principal may be made back to the settlor without the risk of adverse estate– and gift–related consequences. However, distributions should be made with caution to avoid the risk of the trust being reclassified as a grantor trust under Sec. 674. For example, if distributions are to be made back to the settlor, they must be approved by a power–of–appointment committee and/or an independent trustee. Though not a requisite standard, limiting the amount that may be distributed back to the settlor to an ascertainable standard as defined in Sec. 2041(b)(1)(A) may provide an additional safeguard from any potential reclassification to grantor trust status. Compared to other types of trusts, an ING trust’s ability to make distributions back to the settlor adds an additional element of flexibility in the event the settlor needs access to funds held within the trust.

Asset protection and privacy

While each state’s laws differ, certain states such as Nevada have favorable asset protection laws that shield the assets held in trust from the grantor’s creditors. Assets placed in a NING trust generally may not be used to satisfy debts or claims against the grantor arising from divorce, lawsuits, or other liabilities.¹⁰

Similarly, while strong privacy laws do not necessarily apply only to ING trusts, Nevada, like many of the states that allow ING trusts, has such laws preventing the details of trusts from being made public, meaning the identities of the settlor, trustee, and beneficiaries remain private. For certain types of assets where ownership is made public, titling assets in the name of the trust could provide additional privacy.¹¹

Dynastic planning

An ING trust, if established in the right jurisdiction, can be structured as a dynasty trust. A dynasty trust is simply an irrevocable trust that can remain in existence indefinitely or for an extended period of time, allowing wealth to pass down to multiple generations while minimizing estate, gift, and generation–skipping taxes.

Not all states allow dynasty trusts. Many states still adhere to some form of the rule against perpetuities and limit a trust’s duration. Examples of duration limits include limiting the term of the trust to a life in being (a person alive) at the time the trust is created plus 21 years, or a flat 90 years.

States that permit ING trusts, however, often allow for longer trust terms. Nevada, for example, allows a trust to last for up to 365 years. When contrasted with the 90–year limit adopted by many other states, this term is significantly longer and, therefore, significantly more tax–efficient and advantageous for dynastic planning.

It is important to note that dynastic planning itself, much like asset protection and privacy laws, is not unique to ING trusts. Rather, certain states that permit ING trusts, such as Nevada, also provide a framework for dynasty trusts.

Qualified small business stock planning

Under the Sec. 1202 qualified small business stock (QSBS) exclusion, some or all of the gain on the sale of stock issued by a domestic C corporation may be excluded from gross income if the requirements of Sec. 1202 are met.

To provide a very high–level overview of the exclusion, certain noncorporate shareholders who sell qualifying stock of a domestic C corporation that they have held for more than five years can exclude from gross income the gain from the sale of the stock up to:

• $10 million, reduced by the aggregate amount of gain excluded under the QSBS exclusion attributable to dispositions of the corporation’s stock in previous years, or
• If greater, 10 times the aggregate adjusted bases of the QSBS issued by the corporation and disposed of by the taxpayer during the tax year.¹²

As the name suggests, this exclusion applies to sales of stock in small businesses. To be a qualified small business, the issuing corporation must have had gross assets of $50 million or less at all times after Aug. 9, 1993, and before and immediately after the stock issuance.¹³ Again, this high–level overview is not intended to be comprehensive. The complete requirements and nuances of QSBS eligibility are beyond the scope of this article.

A $10 million capital gain exclusion alone would provide great value to most investors, but implementing a strategy that incorporates ING trusts may allow for additional QSBS exclusions. Before going into the mechanics and support for this, it should be noted that there is risk involved with this technique, referred to as “stacking,” and its use falls within a gray area of the law.¹⁴

Sec. 1202(h)(2)(A), in conjunction with Sec. 1202(h)(1), provides that a transferee of QSBS, having acquired the stock by gift, will be treated as having acquired such stock in the same manner as the transferor and having held such stock during any continuous period immediately preceding the transfer during which it was held by the transferor. In other words, if the eligibility requirements were met in the hands of the donor, they will also be met in the hands of the donee. The QSBS exclusion applies for income tax purposes on a per–taxpayer basis. An ING trust, as a nongrantor trust, is a separate taxpayer for income tax purposes. Thus, establishing an ING trust and funding it with QSBS requires no utilization of the grantor’s lifetime gift tax exclusion and may provide for (“stack”) an additional $10 million of QSBS exclusion.

Basis step-up at death

Though it may seem relatively obvious, it should be noted that since the transferred assets are still includible in the grantor’s estate, the underlying assets of the trust generally will receive a step–up in basis to their fair market value at the grantor’s death.¹⁵ This is a significant benefit to the trust’s ultimate beneficiaries, as it could largely reduce future gains on the disposal of inherited assets in their hands.

Other benefits

Other potential benefits of an ING trust include the deferral of gift tax and probate avoidance.

There is an opportunity to establish an ING trust with the intention of eventually completing the gift at a certain point in the future, all the while realizing the benefits described above prior to completing the gift in the future. Perhaps there is proposed legislation on the horizon with uncertain consequences, and the donor wishes to wait until he or she knows its outcome prior to making the gift. Alternatively, suppose the value of the asset being gifted is somewhat volatile in nature — the donor may wish to determine the trend in appreciation in the asset’s value prior to making the gift, or the donor may wish to make the gift once the value of the asset reaches a specified target value.

As with assets held in other types of trusts, probate avoidance is also a benefit of ING trusts. Probate can be costly and may result in unintended outcomes. The avoidance of probate is always a welcomed benefit.

Issues and considerations

There are a number of potential issues and considerations to be aware of when establishing ING trusts.

Though certain powers are retained, preserving some level of control to the grantor, the assets are still being transferred to a separate party to maintain and administer. The relinquishment of complete control in exchange for a much lesser level of control should be noted. The grantor is no longer able to treat assets held in the trust as if they were his or her own.

To expand on this reduced level of control, a power–of–appointment committee acting in conjunction with a distribution trustee is a standard configuration for an ING trust and often used. The power–of–appointment committee is typically composed of other members with a beneficial interest in the trust, making them adverse parties. The distribution trustee is often an independent third–party trustee, such as a professional trust company. Some combination of these roles is necessary to ensure that incomplete gift and nongrantor status are both maintained. Certain modifications to the trust agreement, such as the removal of the power–of–appointment party or distribution trustee could cause the treatment to change for purposes of gift tax, income tax, or both.

In general, distributions should be made with caution. Distributions to a nongrantor beneficiary may result in a completed gift, causing utilization of the grantor’s lifetime exclusion or, if the donor’s lifetime exclusion has been exhausted, gift tax owed. Distributions back to the grantor may trigger state income tax and/or some form of accumulated earnings tax, depending on the grantor’s state of residence. Distributions back to the grantor without the proper checks and balances in place or distributions made that clearly indicate the grantor did not relinquish control may cause the trust to be reclassified as a grantor trust.

The trust’s underlying assets should also be considered when making any distributions of assets. Certain assets, such as installment notes, which are common in ING trusts, may have surprising income tax consequences upon distribution or transfer.¹⁶

Lastly, the economic substance of the ING trust may be scrutinized. Simply establishing a trust to obtain favorable income tax treatment where there is no actual change in economic position could lead to the whole transaction being challenged. In determining whether a trust lacks economic substance, courts will analyze the facts and circumstances of the trust, including, but not limited to, the following factors:

• Whether the taxpayer’s relationship as grantor to property purportedly transferred into the trust differed materially before and after the trust’s formation;
• Whether the trust had a bona fide independent trustee;
• Whether an economic interest in the trust passed to trust beneficiaries other than the grantor; and
• Whether the taxpayer honored restrictions imposed by the trust or by the law of trusts.¹⁷

Recent developments

In an effort to prevent resident taxpayers from avoiding state income taxes by establishing ING trusts in more taxpayer–friendly states, certain states such as New York and, more recently, California have rendered the use of ING trusts largely ineffective for state income tax minimization purposes by passing legislation that treats ING trusts as grantor trusts.¹⁸

California passed S.B. 131 in 2023, which included the addition of Section 17082 to the California Revenue and Taxation Code. The newly enacted law states the following:

For taxable years beginning on or after January 1, 2023, the income of an incomplete gift nongrantor trust shall be included in a qualified taxpayer’s gross income to the extent the income of the trust would be taken into account in computing the qualified taxpayer’s taxable income if the trust in its entirety were treated as a grantor trust under Section 17731.¹⁹

This means that, for California state income tax purposes, the ING trust will be treated as a grantor trust. The income of the trust will be taxed to its grantor regardless of trust situs or distributions made.

In the case of California and, likely, other states that pass similar laws, the treatment is on a prospective basis. Previously earned income not distributed and not yet taxed by the grantor’s state of residence remains untaxed.

Solutions and alternate paths forward

If new legislation in the taxpayer’s state of residence has affected the intended use of an ING trust, there are potential solutions or alternate paths forward. Included below are a few potential options for existing ING trusts:

Complete the gift: Legislation such as California’s newly passed law only targets incomplete gift nongrantor trusts. Modifying the trust agreement to remove any retained powers causing incomplete gift treatment may be a viable option if the grantor has sufficient lifetime gift and estate tax exclusion remaining. The increase in the annual exclusion due to inflation adjustments may have created enough exclusion to cover the amount of the contemplated gift. As a reminder, if sufficient exclusion does not exist, this will result in gift taxes owed.

Take no action: Though income earned on a prospective basis may be taxable to the grantor for state income tax purposes, this may not be consequential enough to undo previous planning. There may be a considerable amount of previously undistributed, untaxed income that can continue to remain untaxed if no action is taken. As previously mentioned, depending on the state of residence, a distribution of previously untaxed income may result in a large tax bill due to an accumulated earnings tax being triggered.

Move to a different state: Depending on what is at stake, an option, though extreme, may be for the grantor to move to a state that does not have anti-ING laws in place. There may be an opportunity to establish residency for a specified period and then take any distributions as necessary. The rules for breaking residency can prove burdensome in some states, though, so the rules should be carefully reviewed prior to deciding on any relocation.²⁰

Distribute trust assets back to the settlor and start over: Assuming the trust agreement allows for this and consent is obtained from the relevant parties, it may make the most sense to distribute all trust assets back to the settlor in complete liquidation of the trust, undoing any previous planning, and seek a new trust structure to accomplish the desired goal. While this may not sound like an ideal solution, it may be worthwhile to avoid an ING trust’s complexities and administration costs if the associated state income tax savings no longer exist.

Depending on the goals and desired outcomes, utilizing a different trust structure may be a possibility. Trusts such as spousal lifetime access trusts, spousal lifetime access nongrantor trusts, inter vivos qualified terminable interest property trusts, and certain beneficiary defective trusts may be viable alternatives to accomplish similar goals, though not without considerations and roadblocks of their own.

Flexibility and value

With the correct selection of states and proper planning in place, ING trusts can provide great flexibility and value to their grantors and beneficiaries. Even with certain states passing legislation to limit the use of these trusts for state income tax planning purposes, many other uses and benefits still exist.

Footnotes

¹Regs. Sec. 25.2511-2(b).

²Sec. 2038.

³Regs. Sec. 20.2036-1(a)(3)(i).

⁴Regs. Sec. 20.2036-1(a)(3)(ii).

⁵Regs. Sec. 25.2511-2(c).

⁶Id.

⁷Id.

⁸Regs. Sec. 25.2511-2(b).

⁹Regs. Secs. 25.2511-2(b), 25.2511-2(c), and 25.2511-2(e). See, e.g., IRS Letter Ruling 201613007.

¹⁰Nev. Rev. Stat. §166.170.

¹¹Nev. Rev. Stat. §§166.170 and 164.041.

¹²Sec. 1202(b)(1).

¹³Sec. 1202(d).

<p¹⁴>See Lederman and Casteel, “Qualified Small Business Stock: Gray Areas in Estate Planning,” 55 The Tax Adviser 30 (April 2024).

¹⁵Sec. 1014(a)(1).

¹⁶For example, under Sec. 1038(g). For more on Sec. 1038 (in a nontrust context), see Homsany, “Seller Beware: Repossessions in Real Estate Installment Transactions,” 56 The Tax Adviser 40 (January 2025).

¹⁷Markosian, 73 T.C. 1235 (1980), at 1243—45.

¹⁸N.Y. Tax Law §612(b)(41), enacted in 2014, includes trust income in the taxable income of a resident individual “who transferred property to an incomplete gift non-grantor trust.”

¹⁹Cal. Rev. & Tax. Code §17082(a).

²⁰See Doolittle and Klein, “Changing Domicile From a High-Tax State to a Low-Tax State,” 55 The Tax Adviser 54 (December 2024).

Contributor

Douglas Yost, CPA, is a partner with Navolio & Tallman LLP in Walnut Creek, Calif.For more information about this article, contact thetaxadviser@aicpa.org.

AICPA & CIMA MEMBER RESOURCES

Article

Lederman and Casteel, “Qualified Small Business Stock: Gray Areas in Estate Planning,” 55-4 The Tax Adviser 30 (April 2024)

Podcast episode

“What You Need to Know About CA ING Trusts,” AICPA Personal Financial Planning Section (Nov. 16, 2023)

Section resources

The Income Taxation of Grantor Trusts(Tax and PFP Section)

2024 Estate and Trust Income Tax Return Checklist — Form 1041 (Long) (Tax Section)

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Estate Planning Certificate Program (Exam + Course)