For many years, high-income residents of states with high tax rates utilized WINGs, NINGs, and similar incomplete-gift non-grantor trusts as a strategy to mitigate state income tax on investment income and capital gains. While these structures are frequently discussed in a California context today, they were also widely used by residents of New York, New Jersey, Massachusetts, and Connecticut.
The strategy was conceptually straightforward:
🔹 Assets were transferred to a trust in a no-income-tax state such as Nevada, Wyoming, or Delaware
🔹 The trust was structured as a non-grantor trust for income tax purposes while remaining an incomplete gift for estate tax purposes to maintain flexibility
🔹 The objective was for the trust—rather than the individual resident—to be treated as the taxpayer
🔹 While federal income tax still applied, the goal was to eliminate state-level income tax on the trust's earnings
Under prior regulatory environments, this structure was a widely recognized planning tool.
That framework began to change over a decade ago. New York was the first major state to directly address this strategy. Effective January 1, 2014, New York amended its tax law to treat ING trusts as grantor trusts for state purposes when the grantor is a New York resident. This approach, which attributes the trust's income directly to the individual, served as a precursor to legislative actions in other states.
California adopted a similar statutory change more recently. Beginning in 2023, California law generally treats ING trusts as grantor trusts for California income tax purposes. If the grantor is a California resident, the trust's income is typically taxable to them at the state level, regardless of where the trust is domiciled. A narrow exception exists for trusts that distribute at least 90% of their annual income to qualified charities.
In practice, these legislative and regulatory updates generally result in trust income flowing back onto the grantor's state tax return. In the jurisdictions that have adopted these rules, the state-level tax benefits that originally motivated these structures have been significantly curtailed or eliminated. While the trust structures themselves may remain legally valid, they may no longer align with the primary tax-efficiency goals for which they were designed.
For educational purposes only. Not legal or tax advice.