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The Big Question And Its Little Siblings

The Big Question

99.9% of Valur customers begin with the same question. The short version of this question is “what Valur product is right for me?” The long version of this question is “I live in [insert state] and I want to maximize tax savings for [insert asset type], what is the right Valur product for me?” That is the big question. 

The Big Question’s Little Siblings

The big question is always followed by additional questions.  Similar to the big question, the follow-up questions are pretty consistent across all Valur customers. The follow-up questions tend to look like this: 

  1. why is [insert relevant Valur product name] the best option for me; 
  2. from a legal perspective, how/why does [insert relevant Valur product name] help with tax planning;
  3. will I lose the tax savings if/when I try to remove assets from the trust; and/or,
  4. what does the process look like in practice?

Some Initial Answers

Addressing the big question and its little siblings requires covering a lot of material. In order to prevent this article from being textbook-like tome, we created some hypothetical customer profiles that allow us to address these questions at a high level. We’ve included links to external resources for readers that would like to dig deeper. 

Hopefully, this article will address your initial questions, but every customer is unique, so please reach out to us to discuss the specifics of your situation.

Table Of Hypothetical Customers And Their Relevant Characteristics

In order to address the big question and it’s little siblings we will use the six hypothetical personas in the table below. The easiest way to use this article is to find the persona on this table that sounds the most like you and then scroll down to the relevant section.

Hypothetical Valur Customers And Their Relevant Characteristics

 

Amy

Who is Amy? What are her assets? What are her financial goals? 

Amy lives in California and has intangible appreciating assets that are not eligible for the qualified small business stock exemption. Amy’s assets include startup equity, cryptocurrency, and public market equities. Amy expects these assets to appreciate significantly and would like to minimize potential taxes on that appreciation. 

What Valur product is best for Amy? 

The best product for Amy would likely be an incomplete non-grantor (“ING”) trust with herself as a contingent beneficiary. 

*At the time of this post, an ING trust would be a good choice for Amy. However, it is possible that California may pass a law/rule (similar to one that New York already has in place) that disallows the use of ING trusts for tax preferential treatment where the same person is the trustmaker/grantor and the beneficiary. If California passes such a law, a BDIT with herself as a contingent beneficiary might be a good solution for Amy instead of an ING.

Why is an ING trust the best product for Amy? 

ING trusts provide a way for Californians to move taxation from the individual level to the trust level. If the trust and the trust assets are properly structured and situated in a state with no income tax, like South Dakota, Amy could realize huge income tax savings on assets that appreciate.

Will Amy have to pay taxes when she takes assets out of the trust?

Because Amy lives in California, and California has what is known as a “throwback rule”, she will have to pay California income taxes on the appreciation of the assets if she removes them from the trust while she is still a California resident. 

However, having appreciating assets in a trust in a tax free state can be advantageous even if your state has a “throwback rule”. This is because: (a) it allows for the deferral of state taxes; and, (b) if Amy moves to a state without a throwback rule before taking the distribution she can avoid the state income tax entirely. (See this article for additional information on the benefits of having appreciating assets in a trust in a tax free state even if your home state has a “throwback rule.)

How/why do ING trusts work in California? 

Some trusts are passthrough entities for tax purposes (meaning the person who puts assets into the trust pays taxes on said assets) and other trusts are their own taxpayer (meaning the trust gets a taxpayer ID and the taxes do not pass through to the person who put the assets into the trust). ING trusts work because the trustmaker gives up enough direct control over the assets for the trust to be its own taxpayer rather than a passthrough. 

For example, Amy would need to give up direct control by relinquishing the power to recall the assets from the trust. (Note that Amy can retain some indirect control by giving that power to a trusted third party and also retaining the power to remove and replace that third party at will.) 

This post provides more detail on how and why ING trusts work. For a detailed example of what it looks like to create an ING trust with Valur, please see this article.

If you’d like to read even more about ING trusts and how they work, here are two additional resources

Beth

Who is Beth? What are her assets? What are her financial goals? 

Beth lives in California and has intangible appreciating assets that are eligible for the qualified small business stock exemption. Beth’s assets include early-stage startup equity, and she would like to minimize her taxes on a liquidation event.

What Valur product is best for Beth? 

The best product for Beth would likely be an incomplete non-grantor (“ING”) trust with herself as a contingent beneficiary. 

*At the time of this post, an ING trust would be a good choice for Beth. However, However, it is possible that California may pass a law/rule (similar to one that New York already has in place) that disallows the use of ING trusts for tax preferential treatment where the same person is the trustmaker/grantor and the beneficiary. If California passes such a law, a BDIT with herself as a contingent beneficiary might be a good solution for Beth instead of an ING.

Why is an ING trust the best product for Beth? 

ING trusts provide a way for Californians to move taxation from the individual level to the trust level. If the trust and the trust assets are properly structured and situated in a state with no income tax, like South Dakota, Beth can realize huge income tax savings on assets that appreciate.

Will Beth have to pay taxes when she takes assets out of the trust?

Because Beth lives in California, and California has what is known as a “throwback rule”, she will have to pay California income taxes on the appreciation of the assets if she removes them from the trust while she is still a California resident. 

However, having appreciating assets in a trust in a tax free state can be advantageous even if your state has a “throwback rule”. This is because: (a) it allows for the deferral of state taxes; and, (b) if Beth moves to a state without a throwback rule before taking the distribution she can avoid the state income tax entirely. (See this article for additional information on the benefits of having appreciating assets in a trust in a tax free state even if your home state has a “throwback rule.)

How/why do ING trusts work in California? 

Some trusts are passthrough entities for tax purposes (meaning the person who puts assets into the trust pays taxes on said assets) and other trusts are their own taxpayer (meaning the trust gets a taxpayer ID and the taxes do not pass through to the person who put the assets into the trust). ING trusts work because the trustmaker gives up enough direct control over the assets for the trust to be its own taxpayer rather than a passthrough. 

For example, Beth would need to give up direct control by relinquishing the power to recall the assets from the trust. (Note that Beth can retain some indirect control by giving that power to a trusted third party and also retaining the power to remove and replace that third party at will.) 

This post provides more detail on how and why ING trusts work. For a detailed example of what it looks like to create an ING trust with Valur, please see this article.

If you’d like to read even more about ING trusts and how they work, here are two additional resources

Carl

Who is Carl? What are his assets? What are his financial goals? 

Carl lives in California and has intangible appreciating assets that are not eligible for the qualified small business stock exemption. Carl’s assets consist of real estate located in California and he would like to minimize his taxes on the event of a sale.

What Valur product is best for Carl? 

Unfortunately, Valur does not have a good tax planning solution for Carl. 

Why doesn’t Valur have a product for Carl? 

Carl could use Valur products to help protect his assets from potential creditors and/or provide additional privacy by moving the legal title of their tangible assets into a trust. Unfortunately, the potential tax planning benefits of Valur products don’t extend to tangible assets. The reason for this is simple; in order to take advantage of the tax planning benefits of Valur, one must be able to move their assets from a state with high state income taxes into a trust in a state with no state income taxes (e.g. South Dakota). This is easy to do with intangible assets and hard to do with tangible assets.

Intangible assets (like stock in a company, investment accounts, or cryptocurrency) exist on paper, on the internet, or on the books of a market maker. You can’t touch them, drive them, or live in them, and that is why they are considered intangible. As such, they can be moved to South Dakota quite easily. Transfer legal title to a trust situated in South Dakota with a South Dakota investment manager and boom, the asset is now a South Dakota asset.

One the other hand, tangible assets physically exist in the world and therefore can’t be easily moved to South Dakota. If Carl has a real estate empire in California he cannot pick up the buildings and move them to South Dakota. Now, Carl may be thinking, “well what if I just transferred the legal title of my real estate to a trust in South Dakota?” That would not work. People have tried it, but California inevitably says, “too cute by half, we don’t care that legal title has been transferred to another state, these buildings are in our state and we’re taxing the income on them.”

Dev

Who is Dev? What are his assets? What are his financial goals? 

Dev lives in New York and has intangible appreciating assets that are not eligible for the qualified small business stock exemption. Dev’s assets include startup equity, cryptocurrency, and public market equities. Dev expects these assets to appreciate significantly and would like to minimize potential taxes on that appreciation. 

What Valur product is best for Dev? 

The best product for Dev would likely be a beneficiary defective inheritor’s trust (“BDIT”) that is structured as New York exempt.

Why is a BDIT the best product for Dev? 

The tax code and the IRS prohibit the use of trusts to transfer assets to others on a tax-advantaged basis if the grantor/trustmaker retains control over said assets, and the ING trusts discussed for the California examples above do not provide income tax benefits for New York residents because New York has disallowed income tax planning with ING trusts.  

BDITs provide a clever end-around by creating a way for someone to get assets into a trust (in an income tax free state) for their own benefit without being the grantor/trustmaker for tax purposes. If Dev’s BDIT is structured so that it is New York resident exempt, it will provide Dev with an opportunity to: (a) avoid New York income taxes on any future appreciation; and, (b) remove the value of the assets (as well as all future appreciation) from his estate without triggering any gift tax liability. In other words, a BDIT could allow Dev to shift ownership of his assets to a trust in a state with 0% state taxes, avoiding New York taxes while maintaining the assets for his own benefit.

Will Dev have to pay taxes when he takes assets out of the trust?

If Dev times his distributions properly he will not have to pay New York income taxes when he takes his assets out of the trust. In states without a throwback rule (New York and New Jersey, for example), the gain from appreciation/interest (outside of dividends) on the assets in the trust shifts to principal after the trust pays its taxes. Once the gain has converted from interest to principal it can be distributed to the beneficiary as a distribution of principal, which is not subject to income tax

How/why does a New York Exempt Resident BDIT work? 

BDITs are quirky, and it can take some time to wrap your head around the way that they work. In this article we do our best to explain how and why BDITs work in New York without going too deep into legal jargon and in this article we give an example of what creating a BDIT with Valur looks like. 

If you would like to go deeper with your research, here is another resource. And if you would like to go really deep, here is a 60 page article on BDITs.  

Edgar

Who is Edgar? What are his assets? What are his financial goals? 

Edgar lives in New York and has intangible appreciating assets that are not eligible for the qualified small business stock exemption. Edgar’s assets include startup equity, cryptocurrency, and public market equities, all with a low basis, and he would like to minimize his taxes on a liquidation event.

What Valur product is best for Edgar? 

The best product for Edgar would likely be a beneficiary defective inheritor’s trust (“BDIT”) that is structured as New York exempt.

Why is a BDIT the best product for Edgar? 

The tax code and the IRS prohibit the use of trusts to transfer assets to others on a tax-advantaged basis if the grantor/trustmaker retains control over said assets, and the ING trusts discussed for the California examples above do not provide income tax benefits for New York residents because New York has disallowed income tax planning with ING trusts.  

BDITs provide a clever end-around by creating a way for someone to get assets into a trust (in an income tax free state) for their own benefit without being the grantor/trustmaker for tax purposes. If Edgar’s BDIT is structured so that it is New York resident exempt, it will provide Edgar with an opportunity to: (a) avoid New York income taxes on any future appreciation; and, (b) remove the value of the assets (as well as all future appreciation) from his estate without triggering any gift tax liability. In other words, a BDIT could allow Edgar to shift ownership of his assets to a trust in a state with 0% state taxes, avoiding New York taxes while maintaining the assets for his own benefit.

Will Edgar have to pay taxes when he takes assets out of the trust?

If Edgar times his distributions properly he will not have to pay New York income taxes when he takes his assets out of the trust. In states without a throwback rule (New York and New Jersey, for example), the gain from appreciation/interest (outside of dividends) on the assets in the trust shifts to principal after the trust pays its taxes. Once the gain has converted from interest to principal it can be distributed to the beneficiary as a distribution of principal, which is not subject to income tax

How/why does a New York Exempt Resident BDIT work? 

BDITs are quirky, and it can take some time to wrap your head around the way that they work. In this article we do our best to explain how and why BDITs work in New York without going too deep into legal jargon and in this article we give an example of what creating a BDIT with Valur looks like. 

If you would like to go deeper with your research, here is another resource. And if you would like to go really deep, here is a 60 page article on BDITs.  

Felicia

Who is Felicia? What are her assets? What are her financial goals? 

Felicia lives in New York and has tangible appreciating assets that are not eligible for the qualified small business stock exemption. Felicia’s assets consist of real estate holdings located in New York, and she would like to minimize her taxes on the event of a sale.

What Valur product is best for Felicia? 

Unfortunately, Valur does not have a good tax planning solution for Felicia. 

Why doesn’t Valur have a product for Felicia? 

Felicia could use Valur products to help protect her assets from potential creditors and/or provide additional privacy by moving the legal title of their tangible assets into a trust. Unfortunately, the potential tax planning benefits of Valur products don’t extend to tangible assets. The reason for this is simple; in order to take advantage of the tax planning benefits of Valur, one must be able to move their assets from a state with high state income taxes into a trust in a state with no state income taxes (e.g. South Dakota). This is easy to do with intangible assets and hard to do with tangible assets.

Intangible assets (like stock in a company, investment accounts, or cryptocurrency) exist on paper, on the internet, or on the books of a market maker. You can’t touch them, drive them, or live in them, and that is why they are considered intangible. As such, they can be moved to South Dakota quite easily. Transfer legal title to a trust situated in South Dakota with a South Dakota investment manager and boom, the asset is now a South Dakota asset.

One the other hand, tangible assets physically exist in the world and therefore can’t be easily moved to South Dakota. If Felicia has a real estate empire in New York she cannot pick up the buildings and move them to South Dakota. Now, Felicia may be thinking, “well what if I just transferred the legal title of my real estate to a trust in South Dakota?” That would not work. People have tried it, but New York inevitably says, “too cute by half, we don’t care that legal title has been transferred to another state, these buildings are in our state and we’re taxing the income on them.”

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!