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7/22/2025 Tax Planning Trust Services

ING Trusts: Smart Planning for Big Exits

Especially for those in high-tax states, tools like an incomplete gift , non-grantor trust have the potential to reduce taxes on major asset sales.

You might already be familiar with some of the benefits of trusts, such as protecting assets for the benefit of your heirs and avoiding what can be a costly probate process. But trusts can be used for a lot more – including sophisticated tax planning. For example, an incomplete gift, non-grantor trust, known as an ING trust, offers the potential to reduce state-level income and capital gain taxes incurred on the sale of highly appreciated assets. This strategy can be particularly useful for those who are planning to exit a high-value, closely held business or investment interest, particularly if they live in a state with high income taxes.

What's in a Name?

To understand an incomplete gift, non-grantor trust, it helps to understand its two defining characteristics.

Completed Gifts vs. Incomplete Gifts

When a trust is created and its creator (known as the grantor) transfers property into it, the transfer of property can be categorized as either a “completed gift ” or an “incomplete gift .” A completed gift is treated just how it sounds – the transfer is considered a gift for tax purposes, and the grantor uses up part of their lifetime gift exemption (or, if the exemption has already been exhausted, incurs gift tax). The value of the property transferred to the trust in a completed gift is then excluded from the grantor’s taxable estate.

With an incomplete gift , however, the transfer may be disregarded entirely for gift tax purposes. In that instance, the transfer does not use up the lifetime gift exemption, and the value of property transferred to the trust remains part of the grantor’s taxable estate. The ING strategy uses incomplete gifts that are disregarded for gift tax purposes.

Grantor Trusts vs. Non-Grantor Trusts

A grantor trust is treated, for tax purposes, as owned entirely by the individual who established the trust. Income produced by a grantor trust is taxable to the grantor, individually, at their individual tax rate(s). A non-grantor trust can be considered a taxpaying entity that is separate from its grantor. The income produced by a non-grantor trust is primarily taxable to the trust itself, at the trust tax rate(s) set by applicable law.

This is a meaningful distinction because tax rates for individuals tend to be significantly lower than those for trusts – both federally and in most states. Grantor trusts are often used where it makes sense to have trust income taxed at a grantor’s lower individual income tax rate. However, for high-income individuals who are already paying tax at the highest applicable rates, or for those individuals anticipating a large windfall that will place them in the highest applicable federal and state brackets for a given year, non-grantor trusts – such as ING trusts – can provide advantages that are unavailable to grantor trusts.

How Do ING Trusts Work?

Transferring property to an ING trust as an “incomplete gift ” can result in significant tax savings. Because the grantor will likely take distributions from the ING trust after the transferred assets have been sold, the lifetime gift exemption is not “wasted” on the value of the assets transferred to the trust, which may return to the grantor in the form of future distributions. Plus, grantors who have already used up a large portion of their lifetime exemption can avoid incurring gift tax on the initial transfers to the ING trust.

The ING trust can also be draft ed in a way that gives the grantor the option to “trigger” completed gift treatment of the trust assets to the extent of any remaining lifetime gift exemption, at a time of their choosing. This provides flexibility in removing assets from the grantor’s taxable estate, if desired.

As a non-grantor trust, the ING strategy also allows a grantor to take advantage of the “separate taxpayer” status by establishing the ING trust in a state that does not levy a tax on trust income. With careful planning, assets transferred into the ING trust and subsequently sold by the trust established in the low-tax state can reduce or avoid state-level taxation on the sale.

Limitations to ING Trusts

The suitability of an ING trust strategy depends on several important considerations. For example:

Because the ING trust strategy seeks to reduce or eliminate state-level taxation, it may not be as useful for individuals who already reside in states that do not tax individual income.
The ING trust pays taxes at trust tax rates on income produced from assets within the trust. Therefore, the anticipated tax savings on the sale and estimated future income production must justify the tradeoff from individual or grantor trust tax treatment.

Additionally, the trust and tax laws that apply to the ING strategy are complex and vary by federal and state statute. There are some states where the ING trust strategy is ineffective or impractical, which makes guidance from experienced local attorneys and accountants imperative.

Baird Trust has expertise and trustee capability in several low-tax states that are regarded as desirable jurisdictions for ING trust planning, including Ohio and Tennessee. ING trusts are one of many kinds of specialty trusts that have the potential to achieve bespoke tax outcomes as part of their larger financial and estate plan. Your Baird Financial Advisor working in conjunction with a Baird Trust Strategist, and your attorney and accountant, can help you explore the benefits and suitability of specialty trust planning.

Baird Trust Company (“Baird Trust”), a Kentucky state chartered trust company, is owned by Baird Financial Corporation (“BFC”). It is affiliated with Robert W. Baird & Co. Incorporated (“Baird”), (an SEC-registered broker-dealer and investment advisor), and other operating businesses owned by BFC. The information offered is provided to you for informational purposes only. Neither Baird nor Baird Trust is a legal or tax services provider and you are strongly encouraged to seek the advice of the appropriate professional advisors before taking any action. The information reflected on this page is subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor. Investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor or a member of your Baird Trust team before taking action.

Skip Beckett Trust Officer II

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ING Trusts: A Case Study

Adam is the founder and owner of a successful closely held business, and his income from the business and other sources place him in the highest federal tax brackets. Adam is also a resident of a high-tax state that levies a 10% tax on income and capital gains at the highest level. He has not made any lifetime taxable gifts.

Adam has been approached by a private equity group interested in purchasing his stock in the business for a total value of $42 million. Because Adam founded the business and has grown it organically, his tax basis in his stock is relatively low at $2 million. He therefore faces a taxable capital gain of $40 million. Without any planning, this gain will likely be taxed at the highest federal rates on top of his state’s 10% rate (which alone could cost him $4 million).

Adam has consulted his advisors and decided to pursue an ING trust strategy prior to selling the business.

He establishes an ING trust in a low-tax state that does not levy a tax on trust income, and he transfers his stock in the business into the trust. Because this transfer is designated an incomplete gift, Adam does not use up any of his lifetime gift exemption.

When the business is ultimately sold to the private equity group, the sale is treated as a sale by the ING trust, a separate taxpayer established in the low-tax state. Moreover, through additional planning, the ING trust avoids incurring income or taxable gain tax payable to the high-tax state on the sale, saving $4 million in tax, though the ING trust still must pay federal tax.

Following the sale, the ING trust reinvests the proceeds with the dual goals of continued growth and income production to fund Adam’s lifestyle. The trust distributes cash to Adam as needed, and such distributions are taxable to him both federally and by his state of residence. However, the income produced by the trust that is not distributed to Adam incurs only federal income taxation, since the lowtax state does not tax trust income. The tax regulations in this low tax state also shield the assets of the trust from Adam’s creditors while they remain in the trust.

Because Adam’s initial transfers to the trust received incomplete gift treatment, no gift tax exemption was “wasted” on funding a trust that distributes a portion of its assets back to him. Several years following the sale, Adam decides to use up his lifetime gift exemption and “triggers” completed gift treatment for assets in the ING trust to the extent of his remaining lifetime. This removes the value of those assets from his taxable estate, allowing the assets to continue appreciating without adding to his potential estate tax liability.