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New York Exempt Resident Trusts: Part 2, An Example

This post is a follow-up to our post titled “New York Exempt Resident Trusts”. If you haven’t already, please read that post first.

The Valur New York Resident Exempt Trust is the simplest product that Valur currently has available. However, many people find that an example of how trusts work in practice to be helpful. So here is a New York Resident Exempt Trust example.

A Valur New York Resident Exempt Example.

Assume that Susan is a New York resident with assets that she expects to appreciate. For the sake of this example, let’s say that Susan is an investor with a large portfolio of stocks or cryptocurrencies.

Susan is the type of person who believes in paying taxes but also hates being a sucker. She understands and believes in the benefits of government services so she wants to pay all of the taxes that she owes. But she doesn’t want to pay a penny more than some very wealthy and well-resourced person would pay if they were in the same situation. So Susan reached out to Valur.

Valur explained to Susan that a properly structured New York Resident Exempt Trust could protect her portfolio from potential creditors and minimize state income taxes on any appreciation of the portfolio, all while maintaining control of the assets. Susan thought that sounded great, and agreed to move forward with Valur. Here is how Susan worked with Valur to make that happen.

A. Trust Outside of New York:

Valur helps Susan create a non-grantor trust in South Dakota so that the trust is situated outside of New York.

  1. The non-grantor status of the trust means the trust is its own taxpayer.
  2. The trust being outside of New York is one of the three requirements to be exempt, and South Dakota has no state income taxes.

B. Trustee And Financial Advisors Outside of New York:

Valur helps Susan choose a professional trustee and/or financial advisor for her new trust. This person will reside outside of New York.

  1. The trustee or advisor being outside of New York is another of the three requirements to be exempt.
  2. The trustee holds certain powers that Susan does not hold, such as the power to make distributions or revoke the trust. This is necessary to fulfill the requirements for this type of trust to be tax-advantaged. However, Susan can retain the power to remove and replace the trustee at will. (See our post on Revocable vs Irrevocable Trusts for an explanation of how people give up direct control while retaining enough indirect control to feel comfortable.)

C. No Trust Income Is New York Sourced Income:

Once Valur has the trust set up for Susan, she can transfer the assets in her portfolio into the South Dakota trust.

  1. As long as her assets are intangible (e.g. the assets are not real estate situated in New York), once they are in the South Dakota trust the income becomes South Dakota sourced income, not New York sourced income.

What Happens Next?

With those three simple steps, Susan can avoid New York state and local income taxes on income generated by her portfolio. If Susan were to make her trust a BDIT as well as a New York exempt resident trust, properly timed distributions to Susan will not be subject to New York income tax even though she is still in New York. (This is because the gain from appreciation/interest (outside of dividends) on the assets in the trust shift to principal after the trust pays its taxes, and once the gain has converted from interest to principal it can be distributed to the beneficiary as a distribution of principal, which again is not subject to income tax.) Plus, Susan’s portfolio now has an extra layer of protection between her and potential creditors.

About Valur

We built a platform to give everyone access to the tax and wealth building tools of the ultra-rich like Mark Zuckerberg and Phil Knight. We make it simple and seamless for our customers to take advantage of these hard to access tax advantaged structures so you can build your wealth more efficiently at less than half the cost of competitors. From picking the best strategy to taking care of all the setup and ongoing overhead, we make it easy and have helped create more than $500m in wealth for our customers. Schedule a time to chat with our team and learn more about how we can help you!