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

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The DING and NING don’t necessarily resolve estate planning challenges, because the money remains in the wealthy person’s estate. In the meantime, though, it can save significant state income taxes.

People considering these transactions have to weigh the potential federal tax costs of having the trust receive income instead of sending it to beneficiaries who may pay lower marginal tax rates. There are other limits, including taxes for residents of Connecticut and some other states, the loss of complete control over the assets and restrictions on how soon the assets can be sold after they’re transferred to the trust.

A study by two law professors examining data through 2003 found that about $100 billion had moved to states with the most generous laws for passing assets to heirs. States with an income tax on trust earnings didn’t see a significant increase in funds after changing other trust laws, the study found.

States such as Delaware, South Dakota, Nevada, and Alaska have become hubs for lawyers specializing in trusts and estates.

“It’s lobbying by local bankers and lawyers who are trying to attract business,” said Robert Sitkoff, a Harvard Law School professor and co-author of the study. “The initial payoff for the legislators is you’ve made happy an interest group, with all that entails.”

After that, he said, even without taxing the assets, the states have set up a “clean industry” of lawyers and related offices and the indirect revenues they bring, with few if any costs to the states.

Those lawyers and bankers then lure out-of-staters. Nenno sells Delaware’s century of trust-friendly law — and lack of income taxes on non-residents.

A New York City resident with $1 million in capital gains would face a home-state bill topping $100,000, he said.

“If the trust is set up in Delaware, you avoid that $100,000-plus tax altogether,” Nenno said. “Perfectly legal.”

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