Planning Briefs
Retirement Income Alert: Do You Own A $1 Million Plus IRA In A High Income-Tax State?
Published Wednesday, August 14, 2019 at: 7:00 AM EDT
If you own a $1 million IRA account and live in a state with a high income-tax rate, here's a financial planning tip that could save you thousands annually on state income tax. The strategy requires setting up a trust in a state with no income tax, which is probably not something you do every day. So, here's a primer.
This is a new way to legally reduce your taxes and comply with current tax law, and a key principle driving the strategy recently was affirmed by a Supreme Court ruling. Basically, the non-grantor trust you would set up creates a new taxpayer in a state with no income tax. Then, the non-grantor trust distributes income. If you live in a state with an income tax, establishing the trust outside the reach of the state in which you live eliminates the state income tax you'd otherwise owe.
A recent U.S. Supreme Court ruling upheld the key principle behind the strategy. The June 21st, 2019 majority opinion of the Court ruled against the state of North Carolina, which had argued that Kimberly Rice Kaestner, the beneficiary of a North Carolina trust, owed the state tax on income she received through the trust. The North Carolina trust had been set up by her father, Joseph Lee Kaestner III, a New York resident, in 1992, with Ms. Kaestner named as one of the beneficiaries. In 1997, Ms. Kaestner moved to North Carolina and many years later the state assessed an income tax on the trust, citing a law authorizing North Carolina to tax any trust income for the benefit of a state resident.
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