ING Trusts: The Hot Trend in HNW Estate Planning

Both the proposed and final Section 199A regulations upset many non-grantor trust strategies by adding a new provision that requires aggregation of two or more trusts in certain circumstances. The aggregation rules apply in the Section 199A context and beyond—meaning that they are also relevant for those planning to use ING trusts to avoid the SALT cap.

In general, aggregation is required if the trusts have substantially the same grantor or grantors, and substantially the same beneficiary or beneficiaries, if the principal purpose of forming the trust or contributing additional assets to the trust is the avoidance of income tax. This means that for income tax planning purposes, ING trusts will be most valuable to clients who have multiple natural beneficiaries who can each serve as beneficiary of one trust, or for clients who can justifiably point to a significant non-tax reason for the trust formation.

Showing that a significant non-tax purpose exists is not as complicated as it may seem. Significant non-tax reasons that would promote the likelihood of the IRS respecting the separate ING trusts often include aggregation of ownership within the family, savings generated by centralized asset management, avoidance of repetitive asset transfers within the family, asset protection or to relieve a transferring family member of asset management burdens.

For transfer tax purposes, the calculus on whether a complete or incomplete gift to the ING trust is most beneficial has changed post-reform—primarily because the IRS has released guidance providing that clients will be allowed to make large gifts from 2018-2025 (when the $11.4 transfer tax exemption is in place) without fear of any kind of "clawback" if the client dies in a later year, when the exemption is lower.

This adds a new element into the mix as, historically, most clients actively took steps to avoid making a complete gift in order to avoid current gift tax liability. In light of the expanded exemption and confirmation that current large gifts will not generate adverse tax results, more clients will likely wish to explore the implications of making a complete gift instead.

Conclusion

As is the case with any trust, ING trusts can be complicated, and require the assistance of expert tax advice both in their creation, and in first examining the individual circumstances of the client to determine whether the ING trust will prove valuable.

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