Help minimize your state income tax liability with a personal trust administered in the First State.
- If you are a New York resident with appreciated assets and would like to potentially avoid paying high state and local taxes on that appreciation, establishing a trust in Delaware may help minimize your New York tax liabilities.
- You do not need to have a current trust in order to take advantage of this opportunity.
- This opportunity is even more critical following the effective repeal of the “SALT” (state and local tax) deduction as high earners generally cannot mitigate the burden of state taxes through a federal deduction against gross income.
New York is a high tax state, coming in as the ninth-highest in the country with a top marginal tax rate at 8.82%. New York City applies an additional income tax between 3.078% and 3.876%. Combined, these taxes may exceed 12% for a resident of New York City.
How can a personal trust help me as a New York resident?
If you are a resident of New York state or New York City and have appreciated assets, you can take advantage of tax minimization strategies by establishing a personal trust in the state of Delaware. You don’t need to have an existing trust in order to do so. Personal trusts are an important tool for minimizing a family’s state income tax liability. Holding family wealth inside a trust may limit the ability of New York state and New York City to tax the trust’s income. The “location” of your family’s assets (where your assets are held in trust) is a significant driver of wealth by reducing or eliminating the drag of state (and city) income taxes.
In addition, the opportunity to minimize state income tax is now even more critical following the effective repeal of the “SALT” (state and local tax) deduction as high earners generally cannot mitigate the burden of state taxes through a federal deduction against gross income. If you live in New York and have historically deducted against your federal income tax base your state taxes on investment income such as capital gains, interest, and dividends, then you will likely receive another benefit by administering your personal trust in a tax-friendly jurisdiction such as Delaware.
How New York’s state tax laws create this planning opportunity
New York defines a “resident trust” as a trust established by a New York domiciliary. An “exempt resident trust” is a resident trust that has no New York trustees, assets, or source income. A non-resident trust is any trust that is not a resident trust. New York taxes all New York taxable income of resident trusts but only New York source income of non-resident trusts. Currently, New York applies a throwback tax on distributions of accumulated income to New York resident beneficiaries from exempt resident trusts. Consequently, creating an exempt resident trust, or converting an existing trust into an exempt resident trust, may be an opportunity for you as a New York resident to minimize your New York income taxes by deferring or eliminating state and city taxes on income accumulated in trust.
You may have a significant tax savings opportunity as a New York resident when using a Delaware non-grantor trust. For example, a $1 million long-term capital gain accumulated in a New York resident trust would owe $107,102 in New York state and New York City (NYC) income taxes in 2018. If the trust was structured so New York state and NYC taxes were not payable (e.g., an exempt resident trust), this $107,102 tax liability is eliminated. Moreover, recent changes to the federal tax laws limit the federal deductibility of state and local taxes, thereby compounding the burden of these state and city taxes on your family’s overall wealth.
How do I establish or move a trust to Delaware?
Regardless of your state of residence, you may create a new trust in Delaware and most existing irrevocable trusts may be moved into Delaware for ongoing administration. If you live in New York and created a trust, or you are the beneficiary of a trust, it may be as simple as changing from a trustee who is located in New York to one located in Delaware in order to reduce the trust’s state income tax burden.
Creating a new trust requires engaging an attorney who drafts the trust agreement to meet your specific planning goals. You select the beneficiaries of the trust, often your immediate family members, and determine when and how they may benefit from the assets held in trust. Finally, you select the assets to place in trust that you want to shield from state income tax. While real estate located in New York and assets that produce New York source income generally cannot escape New York tax, you should be able to shield most other assets from state taxes. The cost for establishing the new trust is dependent upon the legal fees charged by the drafting attorney and often comes in under $10,000 based upon the required time and customization that goes into the trust agreement. In many cases, the state tax savings alone outweigh the cost of creating the trust and the ongoing administration of the trust.
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Note that a few states, including Delaware, have special trust advantages that may not be available under the laws of your state of residence, including asset protection trusts and directed trusts. This article is for information purposes only. There is no assurance that any investment, financial, or estate planning strategy will be successful.Download Article