A Domestic Tax Inversion

By May 8, 2015 October 25th, 2018 Estate Planning Blog, Robert Lamm
Robert J. Lamm

Robert J. Lamm

According to Bloomberg Business, more Americans who are living outside the U.S. gave up their citizenship in the first quarter of 2015 than ever before. (see article here). The reason is that last year asset disclosure rules under the Foreign Account Tax Compliance Act (“FACTA”) kicked in. FACTA requires U.S. financial institutions to impose a 30 percent withholding tax on payments made to foreign banks that don’t agree to identify and provide information on U.S. account holders. The new laws, combined with past rules, can make tax filing difficult for U.S. citizens living overseas who set up trusts. In short, the complexity of the law, increasing tax liability, and the cost of compliance are prompting U.S. Citizens to throw in the towel and pledge allegiance to a different flag.

The good news is that one does not have to leave the building to save taxes. Trusts such as a Nevada Incomplete Gift Non Grantor Trust (also called a “NING”) are gaining in popularity for those residing in high income tax states. The benefit of a NING is that it includes asset production along with the elimination of state income taxes because the trust is located in a state with no income tax. For a California Resident, the savings can be substantial considering that the top marginal state income tax rate in California can reach 13.3%. If a California resident implemented a NING Trust, unrealized capital gains and investment portfolio income would be shielded from California income tax under many circumstances.  Sounds too good to be true, doesn’t it? Well, no. It is true. The Franchise Tax Board has stated that if a non-California trustee could make distributions in the trustee’s discretion to a California beneficiary, the undistributed income of such trust should not be subject to California tax. You don’t even have to leave California.