The United States Internal Revenue Service (IRS) considers all Cryptocurrencies as property. This means one thing, taxes on every transaction at both sender and receiver ends. Crypto investors store their currencies in either legal entities such as corporations, partnerships or in trusts.
However, the U.S. Supreme Court In North Carolina Dept. of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, unanimously stated that a state could not tax out-of-state residents on trust income without having minimum contacts.
The court ruled that asserting jurisdiction on a foreign trust based primarily on the residence of a beneficiary was too broad. In the North Carolina case, the trust was formed by the taxpayer’s father who was a resident of New York.
The taxpayer was the daughter, and she was not the trustee and had no control over the trust. This went on to be a very fascinating case where the Supreme Court had to tell North Carolina it couldn’t tax her.
What does this Mean?
So, if you transfer a Cryptocurrency to your living trust, it isn’t a taxable transfer, since a living trust isn’t considered a separate taxpayer. Trust tax rules are complex. What is interesting is the possibility of having your trust pay the lower corporate tax rate of 21% rather than the standard individual tax rate.
Now, State Tax adds a whole different layer on this. State tax is different in different states.
If you are in California, 13.3% is the state tax which is relatively high compared to Nevada or Delaware.
Nevada Incomplete Gift Non-Grantor Trust known as “NING” and its Delaware sibling is known as “DING”. With NING and DING, the donor makes an incomplete gift to the trust, and the trust has an independent trustee.
For tax purposes, most trusts are considered taxable at the location of the trustee. For NING and DING trusts, an institutional trust company is an answer.
The Supreme Court ruling is limited to the handful of states that use the beneficiary residence as the sole factor for determining the state’s taxing jurisdiction. The court has stated that this rule should not impact states that consider beneficiary residence as only one of many factors for determining their tax jurisdiction.
So, can NING/DING trust work protect you and your beneficiaries from state tax? Creative trusts are not a bad option to try, but you need to be careful. You don’t want to stay in the radar for the high tax state to attack.
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