Reduce New Jersey Income Taxes with Creative Trust Planning
Despite the many benefits afforded by the recent tax law, New Jersey residents may feel the sting of the $10,000 deduction cap on combined state income and real estate taxes. Impacted residents may consider changing their domicile to a low or no income tax state such as Florida. Others may simply opt to shield their non-New Jersey assets or income through creative trust planning. An incomplete gift non-grantor irrevocable trust created in a state such as Delaware (DING), Nevada (NING) or Alaska (AING) can eliminate New Jersey state income taxes 1. A combination of favorable I.R.S. rulings and recent limitation on the deductibility of state and local taxes have enhanced the benefits of the DING. Due to the complexity involved, this strategy should be discussed with tax counsel.
The key is to fund the trust with assets that are not located in New Jersey and that generate income that is not sourced to the state. For example, this would work with an investment portfolio, but would not work with New Jersey rental real estate. Moreover, the trustee must not be a New Jersey resident. Clients should be comfortable allowing the cash flow generated by and/or any proceeds from the sale of trust assets to remain in the trust for the foreseeable future, with no immediate need for distributions. Client’s access to the trust assets is through a Distribution Committee comprised of the trust beneficiaries (e.g., children, siblings, etc., other than the client) who can act by majority vote with the client’s consent, as well as unanimously without input from the client. A solid relationship with the trust beneficiaries is required, although there cannot be any pre-arrangement with the Distribution Committee for the return of the trust assets.
This strategy is a powerful planning tool for New Jersey residents who will be adversely affected by the reduced state and local tax deduction. It also works well for those who anticipate realizing a liquidity event upon the sale of appreciated investments, closely-held business interests or other intangibles. Since this is not an estate tax play, the DING assets will be included in the client’s estate at death. However, the client retains a power of appointment exercisable in his/her Will which provides testamentary control over the disposition of the trust assets. Clients should speak with their legal counsel and tax advisors before moving forward.
Contact my associate Jeff Monteiro @ [email protected] if you would like to schedule a conversation to talk more about which tax or retirement strategy is best for you.
DISCLAIMER: This memorandum was produced by Summit Financial Resources, Inc., which provides financial planning services. Securities and investment advisory services are offered through Summit Equities, Inc., Member FINRA/SIPC. 4 Campus Drive, Parsippany, New Jersey 07054. Phone: 973-285- 3600, Fax: 973-285-3666. This memorandum is for your information and guidance and is not intended as legal or tax advice. Legal and/or tax counsel should be consulted before any action is taken. 20180709-636
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1 2014 legislation eliminated the use of this strategy by New York residents.