If you like this video, go ahead and give us a thumbs up and subscribe to our channel! We release new content all the time. As estate planning attorneys, many people know we focus on estate tax planning, but one of the most overlooked areas of our practice is income tax planning. So today, I’m going to talk about how to use a trust to avoid or minimize income tax, specifically by reducing your state income tax liability.
Of course, this strategy works best for clients in jurisdictions that have a state income tax. If you’re in a state like Texas or Florida, which don’t have state income taxes, this may not be as relevant for you. However, it could still be of interest, depending on where the beneficiaries of your trust planning reside.
Long story short, if you set up a trust in a jurisdiction that doesn’t have a state income tax—such as South Dakota, which is recognized as the premier jurisdiction in the country for trust planning—you can move assets into that trust. South Dakota has no state income tax, so it’s an ideal location for this strategy.
For example, if you have a closely held business interest that you’re planning to sell, whether in the near future or a few years down the road, and you’re looking at significant capital gains, you can move that interest into a South Dakota trust. This type of trust is known as an incomplete non-grantor trust. Or, if you have a large investment account and you’re paying a lot in state and local income taxes on capital gains, you can move that investment account into a South Dakota trust.
There are a few different ways to set this up, and while I won’t go into the technical details today, the key takeaway is that this strategy can help you avoid paying state income tax on those assets.
So, if you’re in a high-tax state and looking for ways to reduce your state income tax liability, a South Dakota trust might be a great option to explore. Stay tuned for more details in our upcoming videos, and don’t forget to like and subscribe!