That IRS provision could potentially derail the whole strategy, Dillon said. But compared to the other workarounds that have been proposed by high-tax states, the non-grantor trust “is the only one that’s come out of the fray that seems like a viable structure,” Dillon said.
Mansion Tax
Here’s how it works: First, you set up an LLC in a no-tax state such as Alaska or Delaware. Then, you transfer fractions of that LLC into multiple non-grantor trusts, which are trusts that are treated as independent taxpayers (unlike grantor trusts, where the person who creates them are generally taxed on the trust income). Each trust can take a deduction up to $10,000 for state and local taxes.
If a spouse is designated as the beneficiary, another “adverse” party -- meaning someone who may want the money also -- has to approve any distributions.
Keep in mind that you no longer control or can benefit from anything placed in the trust. And you have to put investment assets in the trust that will generate enough income to balance out the $10,000 deduction. One option would be a vacation home that generates rental income, according to Steve Akers, chair of the estate planning committee at Bessemer Trust. Marketable securities could also work.
Some caveats: If the home placed in the non-grantor trust is sold, the trust recognizes the gains on the sale and has to pay taxes on it -- and it won’t be able to take advantage of a special home sale exclusion that’s available under a separate tax rule. For those with New York residences, putting the home in the LLC or the trust could potentially trigger the state’s 1 percent mansion tax, which is levied on sales of homes of at least $1 million.
‘SALTy-SLAT’
Also, non-grantor trusts may not work for certain taxpayers. Borrowers with large mortgages may be blocked, since their banks may not approve the transfer of the home to an LLC.
Taxpayers whose primary residence is Florida can’t use the strategy either because of complex rules related to the state’s homestead exemption, said George Karibjanian, an estates lawyer in Florida and Washington.
Another estate planning lawyer, Martin Shenkman, said he’s setting up an LLC and two non-grantor trusts for his condo in New Jersey. Shenkman calls the strategy the SALTy-SLAT -- a SLAT is a specific kind of trust.
“This new tax law has made planning more granular,” Shenkman said. “But for a fairly large number of taxpayers, this is doable.”
This article was provided by Bloomberg News.