The Incomplete Non-Grantor Trust (ING) has become an increasingly popular planning tool that has tremendous flexibility to address a variety of succession planning, wealth management and estate issues. The name itself exhibits its flexibility when used as either an Incomplete Non-Grantor trust or as an Intentional Non-Grantor trust. An ING trust reaches its full potential when located in South Dakota, which allows for self-settled trusts, directed trusts, distribution trust advisors, no state income tax and no state capital gains tax.

How ING trusts work

In the past, when the federal estate tax exemption was $5 million or less, the preference was to make an incomplete gift to the trust so as not to use exemption and avoid filing a gift tax return. This incomplete gift gave the ING its name and its popular usage in years with more limited exemption.

The current $11.5 million exemption presents a different opportunity to take advantage of the ability to move significant assets off the grantor’s balance sheet. A gift of the full exemption amount is made to a trust and it is intentionally structured as a non-grantor trust. This amount can then grow in the trust and not be exposed to estate tax upon the death of the grantor. A simplified calculation of the growth of the trust value shows an additional $26,000,000 can be left to heirs or charity, and by this planning technique:

  • $11,500,000 trust value
  • 2% annual dividend/interest income
  • 5% capital appreciation
  • 20 years
  • $38,000,000

What are the benefits of ING trusts?

If a gift is accomplished with assets generating passive income that is not distributed to the grantor in their home state, we have the further benefit of limited home state income tax. South Dakota does not tax the income of trusts providing a significant value to those living in high tax home states.

The benefits are not limited to simply moving an investment portfolio. Most high net-worth clients have created wealth through private equity and real estate. South Dakota’s directed trust statute makes it easier for a grantor to fund the trust with real estate, private equity, or other unique holdings, and to discount the value. When this liquidity occurs in the South Dakota ING trust, the intangible income tax is limited, the state capital gains tax is mitigated, and the full proceeds are available for reinvestment at the direction of the grantor. South Dakota trust structures allow tremendous flexibility for the grantor to direct, control and influence the investment of the trust.

Privacy and asset protection of ING trusts

Privacy and asset protection are two features available in ING trusts that are properly drafted in South Dakota. The following are some notable privacy benefits:

  • The trust does not need to use a family name for the trust. Additionally, the trust can serve as the organizer of a South Dakota LLC to hold the assets, acquire additional assets, or contract with investment advisors.
  • The LLC that holds the trust assets does not appear on a list of entities opened in South Dakota, nor is there a list of the owners of the LLC.
  • Acquisitions or sales of private holdings can be done through the LLC, with a client directing BTC Trust Company of South Dakota to sign documents. This allows the family to direct an acquisition through an anonymous channel, keeping the family name off the potentially public records.

Asset protection is an available feature of a properly drafted South Dakota trust with a South Dakota LLC as an asset. Any lawsuit targeting the assets of the trust, the grantor, or the beneficiaries must occur in South Dakota. All lawsuits involving trusts are automatically sealed in perpetuity, and there will be no public record of the proceedings.

Since the LLC is the owner of the assets, it is the LLC that is sued. South Dakota only provides a charging order, which is similar to a garnishment, as a remedy for those who would sue. There is no judicial foreclosure. Even if the charging order is in place, the cash distributed from the LLC to the trust cannot be collected if we use the proper South Dakota discretionary beneficiary language. When properly drafted, the beneficiaries do not have an income interest in the distribution, nor a property interest in the trust that can be collected by the plaintiff’s attorney. These barriers to successful suit collectively provide tremendous asset protection.

Next steps:

  1. To learn more about INGs and BTC Trust Company of South Dakota’s services, contact me.
  2. Watch this short video about the asset protection benefits of a South Dakota trust.
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