The Delaware Incomplete Non-Grantor Trust (DING, aka NING-for trusts settled in Nevada) is a sophisticated irrevocable trust that functions as follows: Grantor, an Oregon resident, has a substantial amount of stock with a low cost basis. Grantor settles a non-grantor trust [FN1] funded with an incomplete gift [FN2] in a state that has no income tax, such as Nevada or Delaware. Grantor is a beneficiary of the trust along with his children. For our example, lets say he settles the trust in Nevada. Grantor sends the stock certificates (or otherwise transfers ownership) to the NING trustee in Nevada. The Nevada trustee sells the stock, pays federal capital gains, but no state income tax on the gain. Over time, the trustee distributes some of the sale proceeds to Grantor in Oregon. Although Grantor must pay state income tax on the distributions received, the trust funds that stay in Nevada are not subject to Oregon state income tax. When grantor dies, the remaining trust funds are distributed to Grantor’s children (inheritances pass free of income tax altogether).
A DING/NING is not for everyone, but if you think you would benefit from it, you should seek advice from your CPA.
FN1. A “non-grantor trust” is a trust that is treated as its own entity for tax purposes. (For more on “grantor trusts” versus “non-grantor trusts”, click here.) In order to have non-grantor trust status while the grantor is a beneficiary of a trust he settled, he must have a committee of beneficiaries where he doesn’t have control of the trust distributions.
FN2. A trust funded with an “incomplete gift” is another tax designation that means the grantor of the trust retained limited control of the property used to fund the trust-enough control as to avoid paying gift tax (although the trust property is still included in Grantor’s taxable estate). Funding a NING with an incomplete gift is crucial because if it was funded with a completed gift, the grantor would have to pay gift tax when funding the trust, and then income tax when he gets the distribution from the trust, and then the property is back in grantor’s estate and subject to estate tax. By funding the NING with a incomplete gift, you are avoiding one layer of taxation (gift tax).