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New York Exempt Resident Trusts: Part 1

Exempt Resident Trusts can provide New York residents with a way to defer state income taxes with no penalty or completely avoid state income taxes. 

How Do New York Exempt Resident Trusts Work?

For tax mitigation purposes, there are two main parts to NY Resident Exempt trusts: (1) non-grantor status; and, (2) qualifying as an “exempt resident”.

  1. Non-Grantor Status

While there are MANY types of trusts, you can split all trusts into two groups: revocable (grantor) trusts and irrevocable (non-grantor) trusts. The trusts used in complex tax and financial planning tend to be irrevocable trusts.

In a revocable (grantor) trust the terms can be changed by the trustmaker at any time and the trustmaker can get the assets back if he/she wants. (E.g. the “living trusts” that some people use for estate planning.) An irrevocable (non-grantor) trust cannot be changed without the consent of the beneficiaries, so the trustmaker does not have the power to get the assets back. (That doesn’t mean the trustmaker must give up all potential powers; see this post for an explanation of how the trustmaker can still retain some level of indirect control even with an irrevocable trust.)

When a trust has grantor status the income taxes flow through to the grantor/trustmaker. When a trust has non-grantor status the trust becomes its own taxpayer, so the taxation happens at the trust level and not the individual level. In other words, creating a grantor trust in a tax free state won’t help someone minimize their state income taxes, because the trust assets will still be taxed on the individual level. On the other hand, creating a non-grantor trust in a tax free state can help someone minimize their state income taxes, because the trust assets will be taxed at the trust level, and the trust exists in a state with no income tax.

  1. Exempt Resident Status

Trusts in New York can be considered resident, nonresident, or exempt resident. Resident trusts are subject to New York state income taxes, nonresident trusts are subject to New York state taxes on New York sourced income, and exempt resident trusts are exempt from New York state taxes on all of their income.

There are three requirements for a trust to receive exempt status.

  1. The trust cannot be situated in New York. (Valur creates its trusts in South Dakota.)
  2. The trustees and Financial Advisors (i.e. people managing the trust) cannot be based in New York. (Valur can provide the trustees and Financial advisors necessary to fulfill this requirement.)
  3. The trust can’t hold New York sourced income. This is relatively easy for intangible assets (such as equity) because once they are moved into a South Dakota trust all income they generate is now South Dakota income, not New York income. But tangible assets that are physically located in New York (e.g. real estate) will still be considered New York sourced even if ownership is transferred into a South Dakota trust, so these trusts are not a viable solution for income from tangible assets in New York.

Next Steps

On its own, an New York exempt resident trust will allow someone to transfer appreciating assets into the trust and then to another person (as beneficiary) in a tax advantaged way. If someone wanted to get their assets into a New York exempt resident trust and be the beneficiary themselves while retaining the tax benefit, they would likely need to use a New York exempt resident trust in conjunction with a BDIT.

In our next post, we’ll provide an illustrative example that walks through the steps necessary to set up a New York exempt resident trust.

About Valur

We built a platform to give everyone access to the tax and wealth building tools of the ultra-rich like New York Resident Exempt trusts. 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.