Earlier this week, California Gov. Gavin Newsom signed into law a retroactive tax on so-called “INGs” — Incomplete Gift Non-Grantor Trusts.

Note that the law, which is retroactive to Jan. 1, 2023, has some limitations in its scope, but may affect so-called “incomplete gift” planning that high-income taxpayers established to avoid the draconian 13.3% capital gains tax on California residents on sales of assets held long term (including real estate, founders’ stock and qualified small business stock). It may also affect certain kinds of Proposition 19 planning (gifts to trusts for children prior to February 15, 2021), although in more limited circumstances.

The no-income tax states of Delaware and Nevada have been the leading locales for hosting such ING trusts (“DINGs” and “NINGs” respectively). The law does not require INGs to be discontinued, simply that the trusts’ taxable income be reflected on residents’ California state income tax returns. This means that California’s tax will apply to transactions involving trusts sitused out of state where the trust was established by a resident of California as an “incomplete gift.”

There remain strategies available to such taxpayers, but they now require substantial analysis in individual situations. Further, for those taxpayers who established INGs prior to the law, we recommend a comprehensive review of that planning be undertaken by a qualified tax attorney.

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