Not all states are created equal when it comes to income taxes. As part of their estate planning and asset protection schemes, wealthy Americans are taking advantage of this inequality by moving billions of dollars’ worth of assets to newly created trusts in states that do not impose income taxes. A recent article discusses this tax avoidance scheme.
The scheme is similar to that employed by large corporations that move operations or assets overseas to avoid or reduce taxes. Popular states for tax avoidance include Delaware and Nevada. The legislatures for both states have passed laws in order to make their state more appealing for wealthy Americans considering moving their trusts. While Nevada has no state income tax, Delaware allows out-of-state beneficiaries to avoid income tax liability.
Estate planners shifted their focus to income tax avoidance after Congress significantly narrowed the field of individuals who will be responsible for paying federal estate tax. Currently, federal estate taxes only apply to those who have an estate with a total value of $5.34 million.
However, this practice is not without scrutiny. Officials in the state of New York are particularly concerned, as this practice drains an estimated $150 million per year from the state. Recently, a New York tax commission recommended laws that would limit the use of out-of-state trusts.
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