Maximize Income Tax Deductions With An “Incomplete Gift Non-Grantor (Ing) Trust" - Lehigh Valley Elder Law

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, has breathed some new life into a little-used estate planning measure for high income taxpayers. Beginning in 2025 incomplete non-grantor (ING) trusts provide new opportunities to reduce income taxes by shifting income to one or multiple trusts. This can be especially beneficial under OBBBA, which phases out some deductions as income levels increase. Key strategies include spreading state and local tax (SALT) deductions across multiple trusts, getting into a lower tax bracket by shifting income among multiple taxpaying entities, and sheltering Qualified Small Business Stock (QSBS) gains.

What is an “ING”?

An “ING” or incomplete non-grantor trust is a trust whose funding does not constitute a completed gift by the settlor, also called a grantor (creator and funder), under federal gift tax law, but which pays income tax on all undistributed income. Generally, if funding a trust constitutes an incomplete gift, the income tax generated by the trust will be payable by the grantor, thus making the trust as a “grantor” trust. Not so with an ING.

Key Planning Opportunities under OBBBA:

SALT Deduction Maximization: Because OBBBA increased the SALT deduction to $40,000 for married couples, using ING trusts allows taxpayers to “stack” this deduction. A grantor can create multiple ING trusts, each potentially benefiting from its own $40,000 SALT cap.
Income Shifting: By transferring income-producing assets to an ING trust (which is not a grantor trust for income tax purposes), income can be shifted out of the grantor’s high-tax bracket to a separate entity, thereby reducing the overall tax burden.
QSBS Stacking: ING trusts can be used to multiply the benefits of Qualified Small Business Stock by spreading the income among one or more separate taxpaying entities, thereby allowing for significant sheltering of capital gains on stock sales.
State Income Tax Savings: If structured in a state with no income tax (e.g., South Dakota, Nevada), these trusts can avoid state-level taxes on income.
Qualified Business Income (QBI) Deduction Optimization: ING trusts enable a small business with income that exceeds the specified phase out threshold to obtain a larger income tax deduction under section 199A of the Internal Revenue Code. This is achieved by spreading the income among one or more separate taxpaying entities all whose taxable income fall below the phaseout threshold.

Before You Use An Ing Be Aware:

IRS Scrutiny: The IRS closely scrutinizes “trust stacking” for tax avoidance under Substance-Over-Form doctrines.

Complexity: These strategies require careful drafting and legal oversight to ensure the trust is truly “incomplete” for gift tax purposes but a “non-grantor” trust for income tax purposes.