December 18, 2013

Wealthy avoiding taxes by moving assets to no-tax states

The asset shifts mirror steps corporations such as Google have taken across national borders to lower the taxes they pay.

By Richard Rubin
Bloomberg News

WASHINGTON — Wealthy Americans looking to avoid state income taxes are moving billions of dollars in assets to trusts in no-tax states such as Delaware, Nevada and Alaska.

The maneuvers are getting fresh scrutiny from officials in states including New York, which is losing an estimated $150 million a year through such tax avoidance. As fewer Americans pay the estate tax and top earners in New York and California owe more state income taxes, wealth planners say their clients are looking for new ways to escape those levies.

The asset shifts mirror steps corporations such as Google have taken across national borders to lower the taxes they pay. Within the U.S., some individuals who want to sell companies that they built move shares from home states to out- of-state trusts so the gains won’t be subject to state income taxes.

“I can’t sit with a client who has a substantial portfolio or is contemplating selling his business without putting the strategy on the table,” said William Lipkind, a New Jersey lawyer who said he’s been involved in 20 to 25 such transactions in the past year.

Lipkind said he’s moved as little as $700,000 and as much as $500 million. “You scratch your head and say, ‘Why pay if we don’t have to?’ ”

States including Delaware and Nevada have waged a decades-long fight for wealthy Americans’ trusts, competing to write laws that make it easier to pass property across generations and protect assets from creditors. Nevada has no state income tax and Delaware’s tax doesn’t apply to out-of-state beneficiaries.

“The way that states go about taxing trusts is, shall we say, all over the map,” said Dick Nenno, managing director and trust counsel at Wilmington Trust, a Delaware-based subsidiary of M&T Bank Corp. “And that creates some real planning opportunities.”

Using a Delaware Incomplete Non-Grantor Trust, or DING, wealthy residents of high-tax states take advantage of vague or conflicting definitions in state and federal laws. They can move assets just far enough out of their control so they aren’t liable for state income taxes without moving them far enough to trigger a 40 percent gift tax.

Because the trusts are private, there is no comprehensive data on how much money has moved across state borders in recent years or how much revenue the high-tax states are losing. Nevada figures show that trusts there hold $18 billion in assets, up from $8 billion in 2008.

Some high-tax states, such as New York, are seeking ways to stem the flow of money. A state tax commission, led by former Democratic Comptroller Carl McCall and investment banker Peter Solomon, last month recommended laws to limit the use of out-of- state trusts.

The New York Department of Taxation and Finance estimates that the proposed change would generate $150 million a year, or about a 0.4 percent increase in personal income tax collections. Those figures suggest annual income in out-of-state trusts of more than $1 billion and assets much bigger than that.

The use of out-of-state trusts isn’t a new strategy, especially for estate planning and asset protection. What’s changed in recent years is that wealth planners have become more focused on state income taxes.

“The state income taxes have become a huge issue,” said Lisa Featherngill, managing director of planning at Abbot Downing, the wealth-management subsidiary of Wells Fargo & Co.

Congress significantly narrowed the federal estate tax, making the per-person exemption higher, permanent and linked to inflation. Those changes make some more eager to minimize annual state taxes than focus on one-time estate tax savings.

The $5.34 million exemption in place for 2014 means that 1 in 726 people in the U.S. who die will owe federal estate taxes, compared with the 1 in 390 that would have paid taxes if Congress had set the exemption at $3.5 million, according to the nonpartisan Tax Policy Center in Washington.

(Continued on page 2)

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