The Incomplete Gift Non-Grantor Trust

Estate planning is a crucial part of managing wealth, particularly for Texas residents who want to reduce taxes and protect their assets. One effective strategy is the Incomplete Gift Non-Grantor Trust (ING). This type of trust is especially beneficial for Texas residents who are looking to lower their state income taxes and protect their wealth from future tax increases. As we approach 2025, understanding how an ING can help reduce both federal estate taxes and state income taxes is important for anyone focused on long-term financial planning as a Houston, TX revocable living trust lawyer can attest who has been with our firm since its founding in 2021.

What Is An Incomplete Gift Non-Grantor Trust?

An Incomplete Gift Non-Grantor Trust (ING) is a type of trust that allows Texas residents to move assets out of their estate while minimizing taxes, especially state income taxes which can help build generational wealth. By transferring assets into the trust, individuals can avoid triggering immediate gift taxes. The trust itself is responsible for paying income taxes on any income generated by the assets, rather than the person who set up the trust.

Here’s a breakdown of the key terms:

• Incomplete Gift: This means that when you transfer assets into the trust, the IRS does not consider the transfer a completed gift for tax purposes. Even though the assets are moved into the trust, you maintain certain rights or controls, preventing the transfer from being taxed as a gift.
• Non-Grantor: In a Non-Grantor Trust, the person who creates the trust (the grantor) does not pay taxes on the income generated by the trust. Instead, the trust itself is responsible for paying those taxes, which can offer significant tax benefits, especially if the trust is located in a state with no state income tax.
• Trust: A trust is a legal arrangement where assets are managed by a trustee for the benefit of others. It allows individuals to control how their assets are used and distributed, while offering tax advantages that they might not get if they held the assets directly.

How Does An Incomplete Gift Non-Grantor Trust Help Texas Residents With State Income Taxes?

For Texas residents, the Incomplete Gift Non-Grantor Trust (ING) is a powerful tool to reduce state income taxes and protect wealth for individuals and businesses alike. Here’s how it works:

1. Shifting Income To A No State Income Tax State: While Texas does not impose a state income tax, many residents have investments or assets in other states that do. An ING can be established in South Dakota, a state that has no state income tax. By placing assets into the ING, the income generated by those assets will not be subject to state income tax, potentially saving significant amounts of money.
2. Income Taxes Paid By The Trust: In a Non-Grantor Trust, any income generated by the trust’s assets is taxed to the trust itself, not the grantor. If the trust is set up in South Dakota, the income from those assets will not be taxed by South Dakota either. This can be especially advantageous for Texas residents who hold assets in states with high state income taxes, as the ING can shield income from those taxes.
3. Avoiding State Taxes On Gift And Estate Transfers: While Texas does not have a state gift or estate tax, many other states do. By using an ING, Texas residents can reduce the size of their taxable estate, potentially lowering or eliminating any state estate taxes if they have assets in other states. This strategy helps prevent triggering estate taxes in states that impose them, protecting wealth for future generations.

Why Is An Incomplete Gift Non-Grantor Trust Important For Texas Residents In 2025?

As Texas residents look toward 2025, estate planning becomes even more critical due to upcoming changes to federal estate tax exemptions and the potential for higher state taxes in other states. Here’s why an Incomplete Gift Non-Grantor Trust could be crucial for Texas residents in 2025:

1. State Income Tax Savings: The ING allows Texas residents to move income-generating assets into a trust established in South Dakota, which has no state income tax. This can provide significant tax savings for residents who have assets in states with high income taxes, such as California, New York, and New Jersey. Since Texas has no state income tax, this strategy complements the state’s tax benefits by further protecting your wealth from high state income taxes elsewhere.
2. Protection From Future Tax Increases: Even though Texas does not have state income tax, many Texas residents hold assets in other states. States with income taxes often raise their rates to increase revenue. By using an ING and establishing it in South Dakota, Texas residents can avoid future tax increases, protecting their wealth from rising taxes in other states.
3. Avoiding State Estate Taxes: While Texas does not have an estate tax, many other states do. States like New Jersey, Massachusetts, and Washington impose state estate taxes that can reduce the amount of wealth passed down to your heirs. Using an ING can help Texas residents reduce the taxable estate and avoid state estate taxes in those states.
4. Flexibility And Control: The ING allows Texas residents to maintain some control over the assets while still benefiting from tax savings. While the trust itself is responsible for paying income taxes, the grantor can still decide how the assets are used or who will benefit from them. This flexibility makes the ING an attractive option for individuals who want to preserve their wealth and ensure that it is used as they see fit.

How To Set Up An Incomplete Gift Non-Grantor Trust

Setting up an ING is a process that requires the expertise of an estate planning attorney. Here are the general steps for Texas residents to set up an ING:

• Choose South Dakota As The Trust Location: Since Texas does not have state income tax, the next step is to establish the ING in South Dakota, which also has no state income tax. This ensures that income generated by the trust is not subject to state income tax.
• Consult With An Estate Planning Attorney: It’s important to work with an attorney who specializes in estate planning and tax law to ensure the ING is set up properly. The attorney will help structure the trust so it meets both state and federal tax requirements and aligns with your financial goals.
• Fund The Trust: After selecting South Dakota as the trust location and working with your attorney, you’ll need to transfer assets into the trust. These assets could include cash, investments, or real estate. The transfer should be done in a way that satisfies the “incomplete gift” requirements, ensuring it is not considered a completed gift for tax purposes.

For Texas residents, the Incomplete Gift Non-Grantor Trust (ING) is a valuable estate planning tool that can provide significant state income tax savings and protect wealth from future tax increases. By establishing the ING in South Dakota, a state with no income tax, Texas residents can shield their income from state taxes, while also benefiting from flexibility in how assets are managed and distributed. With the federal estate tax exemption set to decrease in 2025, using an ING can help Texas residents reduce their taxable estates and protect their wealth for future generations.

Stuart Green Law, PLLC has been working on estate plans for families that protect their assets. We are licensed in Texas, Kentucky, Pennsylvania, and South Dakota, so contact us for help today.