In the context of trusts, CPAs may have heard someone mention WINGs, DINGs or NINGs. This three-part series aims to explain the advantages, requirements and potential drawbacks of these trusts for estate planning purposes.
An ING trust is an incomplete gift nongrantor trust. (WINGs, DINGs, and NINGs are INGs designating the state under the laws of which they are respectively established: Wyoming, Delaware and Nevada.) When funding the trust, the transfer to the trust is a completed transfer for income tax purposes leading to nongrantor tax treatment, but the transfer is incomplete for gift and estate tax purposes.
In other words, an ING trust’s income is taxed separately from its grantor, but the assets transferred to the trust are still includible in the grantor’s estate.
The trust is structured as a complex trust rather than a simple trust, removing the requirement to distribute trust accounting income annually. The trust’s beneficiaries often include the usual persons, such as the grantor’s descendants, but the grantor may also be named as a beneficiary.
Trust distributions are determined and approved by an independent trustee, a power–of–appointment committee typically composed of adverse parties such as beneficiaries of the trust, or some combination of the two. The grantor may also have limited control over trust distributions, such as the power to veto distributions to other beneficiaries.
Ensuring that this decision–making framework is in place regarding distributions and that the grantor’s control is limited is key to maintaining nongrantor trust status.
What causes the gift to an ING trust to be incomplete for estate and gift tax purposes?
Treasury regulations state that a gift may be considered incomplete if the grantor “reserves any power over its disposition,” whether for the grantor’s benefit or for the benefit of another [Regs. Sec. 25.2511-2(b)].
While not an exhaustive list, commonly retained powers and rights causing incomplete gift treatment and/or estate tax inclusion include:
Estate tax inclusion
The power to amend, alter, revoke, or terminate the trust (Sec. 2038).
The use, possession, right to income, or other enjoyment of the transferred property for any period that does not in fact end before death [Regs. Sec. 20.2036-1(a)(3)(i)].
The right, either alone or in conjunction with any other person or persons, to designate the person or persons who shall possess or enjoy the transferred property or its income for any period that does not in fact end before death [Regs. Sec. 20.2036-1(a)(3)(ii)].
Incomplete gift treatment
Though the above–listed powers and rights causing estate tax inclusion are relevant and should be noted, the powers listed below directly cause incomplete gift treatment and are the more commonly retained powers included in ING trust documents.
Power of the donor to revest the beneficial title to the property in himself or herself [Regs. Sec. 25.2511-2(c)].
Power to name new beneficiaries (unless the power is a fiduciary power limited by a fixed or ascertainable standard) (Id.).
Power to change the interests of beneficiaries as to themselves (unless the power is a fiduciary power limited by a fixed or ascertainable standard) (Id.)
Testamentary power to appoint the property in trust to any person or persons or entity other than the grantor’s estate, the grantor’s creditors, or the creditors of the grantor’s estate [Regs. Sec. 25.2511-2(b)].
Power to consent to or veto distributions: While not directly specified in the Treasury regulations, this power is often found in ING trust agreements and is considered a retained power over the disposition of the transferred assets and allows the grantor to change the interest of the beneficiaries (Regs. Secs. 25.2511-2(b), 25.2511-2(c), and 25.2511-2(e). See, e.g., IRS Letter Ruling 201613007).
Pursuant to Regs. Sec. 25.2511–2(e), a donor is considered to possess a power if it is exercisable by the donor in conjunction with any person who does not have a substantial adverse interest in the disposition of the transferred property or the income therefrom.
Reprinted with permission from The Tax Adviser.
Douglas Yost, CPA, is a partner with Navolio & Tallman LLP.
