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Hard to believe that the IRS is out to screw the fifty states. This special IRS designed Nevada asset protection trust's income avoids state income taxes.
Having a trust in Nevada to avoid state income taxes is not new.
However, in the past you could not control the trust if you wanted the tax savings. Also, you could not be a trust beneficiary. This means once the assets were placed in the trust you cannot get them back.
But there is a tiny tiny crack in the law. And now the IRS is letting all of us know how to use that crack to avoid gift taxes, avoid state income taxes and to protect assets.
The general rule is the trust is a grantor trust if I create the trust and I am a beneficiary or if I am the trustee.
For example, if the trust was in Nevada and earned an hundred thousand dollars of interest income, I pay tax on the hundred thousand dollars if the trust is classified as a grantor trust.
But not now! The IRS found a tiny crack that allowed the taxpayer in this ruling to be both a beneficiary and the owner of the trust company and avoid the grantor trust rules. That $100,000 is not state income tax free.
By the way, also the IRS also ruled that no gift tax was due on the millions of dollars he placed into the trust.
Here is the link to the IRS ruling and my annotations.
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