By: Brice Williams, CFA®
Vice President, Senior Portfolio Manager
First Western Trust, Boulder
For many individuals and families, the tax benefits of living and doing business in Wyoming are quite appealing. If you own a highly-appreciated, low-basis investment such as stock or a closely-held business, a Wyoming Incomplete gift, Non-Grantor Trust (WING) may allow you to avoid state income tax on its sale, as well as provide other benefits. An Incomplete gift, Non-Grantor Trust is a structure where the grantor, or person giving the assets to the trust, is not taxed on trust income. The trust itself is a separate taxpayer. These types of trusts are usually established in states with no state income tax, such as Wyoming. The WING is structured such that the transfer of assets to the trust is not a completed gift for gift tax purposes, and the assets remain part of the grantor’s estate and may receive a step-up in cost basis at the grantor’s death. But, for income tax purposes, the WING is deemed the owner of the assets and responsible for any income tax due.
This strategy has the greatest benefit if the WING is funded with highly-appreciated intangible assets or an investment portfolio that generates substantial taxable income. Because real estate and other tangible property is taxed based on its location, those types of assets generally wouldn’t benefit from being transferred to a WING.
The capital gain realized on the sale of appreciated assets, or other income of a properly-established WING is not subject to state income taxation because the income is deemed to have been generated in Wyoming, by a Wyoming taxpayer. For Colorado residents, this is a savings of 4.63%.
Here is an example of how this works. Bob was the owner of a successful tech company, IntraWeb. When Bob decided it was time to sell his interest in IntraWeb, Bob spoke to his CPA, who referred him to First Western Trust. Because of a very low cost basis in IntraWeb, Bob was looking at a Colorado tax bill of approximately $463,000 on the estimated $10 million sale of IntraWeb. With the help of his CPA, a local estate planning attorney and First Western Trust, Bob created a Wyoming LLC (of which he is the manager) into which he transferred his interest in IntraWeb. Bob also established a WING, with him as the beneficiary, and funded the WING with his interest in the Wyoming LLC. When IntraWeb was sold by the LLC, the WING paid $0 in state income tax.
Establishing a WING is more involved than establishing a standard trust, and requires naming a trustee with a physical presence in Wyoming, such as First Western Trust. WINGs are also irrevocable, although the grantor retains certain access to the trust assets. While becoming more common, WINGs are complicated and require the assistance of qualified legal counsel with experience with these types of trusts. Lawyers are becoming increasingly specialized, and I would highly recommend finding a local network with your estate attorney that understands the tax consequences of business transactions in which your business will engage. Lastly, the transfer of assets to a WING also needs to happen well in advance of a sale, so planning ahead is critical.
In addition to the tax benefits of a WING, Wyoming is also an attractive location for trusts due to its strong asset protection measures and trust-friendly laws, such as allowing trusts to last for up to 1,000 years. Wyoming law also allows greater flexibility to modify the terms of a trust in certain circumstances. Thereby providing your family with greater asset protection and tax reductions for generations to come.
The WING structure isn’t always appropriate or necessary but, in the right situations, it can be a valuable tool to reduce taxes, provide asset protection, grow assets, and be an important part of a family’s comprehensive estate and financial plan, allowing you to build a foundation for the security and protection of your family.
Brice Williams is vice president and senior portfolio manager at First Western Trust, Boulder. To learn more about how you can benefit from a WING, reach out to Brice here.