Can a Trust Cut State Income Tax on Your Investments? (w/Examples) + FAQs

Quick Answer: Yes — for tax year 2025, a properly built non-grantor trust based in a no-income-tax state can shield investment income (interest, dividends, capital gains) from your home state’s income tax. But states like California and New York have shut this down for their own residents, so it works only in some states.

You can legally move your investment portfolio into a trust that lives in a state with no income tax, and that trust — not you — pays the tax on the income those investments earn. Because seven states do not tax trust income at all, the trust can hold dividends, interest, and capital gains and owe zero state income tax, even while you stay put in a high-tax state. The catch is sharp: this only works if your home state lets it, and two of the biggest high-tax states have already passed laws to stop it.

The stakes are large and the timing matters now. The most popular version of this strategy, the incomplete non-grantor trust, can save a high earner tens of thousands of dollars a year — one published example shows a California resident with a $2 million portfolio saving close to $15,000 a year, per a Nevada tax advisory firm. But California killed the benefit for its residents retroactive to 2023, and New York did the same back in 2014, so acting on outdated advice can leave you with a costly, useless trust.

This article reflects federal rules and selected state rules as of June 2026 and covers tax year 2025. Tax law changes — confirm current figures before you file. This is educational, not legal or tax advice for your specific situation; a trust this complex calls for a tax attorney and a CPA before you sign anything.

Here is what you will learn:

🧭 How a non-grantor trust legally separates investment income from your personal state tax return
💸 The exact dollar math behind the savings, with three fully worked examples
🚫 Why California and New York residents cannot use this anymore — and who still can
⚖️ How the Supreme Court’s Kaestner ruling shapes where a trust can be taxed
✅ The step-by-step setup, the costs, the deadlines, and the mistakes that blow up the plan

How Trusts Get Taxed by States

A trust is a legal arrangement where one party (the trustee) holds and manages property for someone else (the beneficiary), under rules set by the person who funded it (the grantor). For income tax, the key question is who pays the tax on the money the trust earns. That answer turns on whether the trust is a “grantor” trust or a “non-grantor” trust, and it controls the entire strategy.

A grantor trust is invisible for income tax. The IRS treats the grantor as the owner, so all the trust’s income flows straight onto the grantor’s personal return. If you live in California and your trust is a grantor trust, California taxes that income as if you earned it directly — moving the trust out of state changes nothing.

A non-grantor trust is its own taxpayer. It has its own taxpayer ID number, files its own Form 1041, and pays tax on income it keeps (accumulates) rather than distributes. This separation is the whole game: if the trust is a separate taxpayer and it is based in a state with no income tax, the income it accumulates escapes state tax entirely.

States decide whether they can tax a trust using “residency” factors. According to Wilmington Trust, states look at where the grantor lived when the trust was created, where the trustee lives, where the trust is administered, and where the beneficiaries live. The consequence is that the same trust can be a resident of one state, several states, or none — and that determines who gets to tax it.

Seven states do not tax trust income at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, per the Multistate Tax Commission. Tennessee also no longer taxes investment income. These states are the “sinks” where a trust can hold investments and owe no state tax, which is why nearly every plan routes through one of them.

The ING Trust: The Main Tool

The headline strategy is the incomplete gift non-grantor trust, almost always shortened to ING. People add a state letter in front: a NING is set up in Nevada, a DING in Delaware, and a WING in Wyoming, as explained by Kodiak Trust. They all do the same job through the same two-part design.

The “incomplete gift” part means you transfer assets into the trust but keep enough control that the transfer is not a completed gift for gift-tax purposes. This matters because a completed gift would use up part of your lifetime gift and estate tax exemption. By keeping the gift incomplete, you avoid spending that exemption, and the assets stay in your taxable estate.

The “non-grantor” part means the trust is structured so the IRS does not treat you as the owner for income tax. This is the delicate balance: you must give up enough control to be a non-grantor trust, but keep enough to leave the gift incomplete. Getting this wrong collapses the whole structure, which is why these trusts are drafted by specialists and blessed by an IRS private letter ruling in many cases.

When it works, the result is clean. You fund a Nevada non-grantor trust with your investment portfolio, the trust accumulates the dividends and gains, Nevada imposes no income tax, and your home state cannot reach the income because the trust is a separate, out-of-state taxpayer. You retain indirect access through distributions approved by an independent committee, so you have not truly given the money away.

Which Situation Applies to You?

The answer to “can a trust cut my state income tax?” depends almost entirely on which state you live in. Use this to find the path that fits you before reading further.

You live in California: The strategy is closed to you for your own ING trust. Senate Bill 131, signed in 2023, treats INGs as grantor trusts for California, taxing the income to you regardless of trust situs. Skip to the California section.
You live in New York: Also closed. New York treated ING trusts as grantor trusts starting in 2014, per Kelley Drye. New York also taxes accumulation distributions paid to New York beneficiaries.
You live in another high-tax state (e.g., New Jersey, Illinois, Connecticut, Oregon, Minnesota): The strategy may still work, but your state’s trust-residency rules decide it. Many tax a trust based on where the grantor lived, with constitutional limits.
You live in a no-income-tax state already: You do not need this strategy for state income tax — you already pay none. A trust may still help with asset protection or estate planning.

Worked Example: The NING Tax Savings

Numbers make this concrete. Here is the math a high earner in a high-tax state can copy, using tax-year 2025 rates and a fictional but realistic taxpayer.

Maria’s NING (Nevada). Maria lives in a state with a flat 8% income tax. She owns a $5,000,000 dividend-and-bond portfolio that throws off $250,000 a year in interest, dividends, and capital gains that she does not need to spend.

Held personally, that $250,000 faces her state’s 8% tax: (250{,}000 \times 0.08 = 20{,}000). She owes $20,000 in state income tax every year, on top of federal tax.
Moved into a properly structured Nevada non-grantor trust that accumulates the income, Nevada imposes no income tax, and — if her state cannot claim the trust as a resident — her state collects $0.
Annual state tax saved: $20,000. Over 10 years, ignoring compounding, that is $200,000 kept inside the portfolio. This mirrors a published NING illustration showing roughly $15,000 saved on a $2 million California portfolio.

The federal tax does not disappear — the trust still files Form 1041 and pays federal income tax on accumulated income, often at the compressed trust brackets that hit the top 37% rate fast. The savings here are purely the state income tax. That is why this only pays off for residents of high-tax states with large, income-producing portfolios they can afford to leave untouched.

The California Shutdown (SB 131)

If you live in California, the ING strategy no longer works for you. On July 10, 2023, Governor Newsom signed Senate Bill 131, adding Section 17082 to the California Revenue and Taxation Code. The plain-English effect: California now treats an incomplete-gift non-grantor trust as a grantor trust, so all of its income is taxed directly to the California resident who funded it.

The consequence is total and retroactive. Per Baker Tilly, the rule applies to tax years beginning on or after January 1, 2023, so even trusts set up before the law passed lost the benefit. A California resident who built a NING in 2022 expecting tax-free accumulation now owes California’s tax — up to 13.3% — on the trust’s income as if no trust existed.

There is one narrow escape hatch. Forbes reports that SB 131 spares an ING only if the fiduciary makes a timely election to be taxed as a California resident non-grantor trust and the trust distributes at least 90% of its distributable net income to a 501(c)(3) charity. That is a charitable-giving structure, not a tax-avoidance one — most people seeking to keep their money will not qualify.

A common misconception is that “moving the trust to Nevada” fixes this for Californians. It does not, because SB 131 taxes based on the grantor’s California residency, not the trust’s situs. What still works, as Forbes notes, is the grantor actually moving out of California — a far bigger life change than retitling a portfolio.

The New York Shutdown (2014)

New York closed this door nearly a decade before California. Effective for tax years beginning on or after January 1, 2014, New York treats ING trusts created by New York grantors as grantor trusts, per Ruchelman. The grantor must report all the trust’s income on a personal New York return and pay the tax.

New York went further with a second rule aimed at all out-of-state non-grantor trusts, not just INGs. According to Kelley Drye, New York now taxes the accumulated income of an exempt resident trust when it is later distributed to a New York beneficiary — the so-called “throwback” rule. So even a clean non-grantor trust cannot accumulate income tax-free and then dump it on a New York resident.

The consequence for New Yorkers is that neither the ING nor a plain out-of-state accumulation trust reliably dodges New York income tax if the money eventually lands with a New York beneficiary. The New York Tax Department guidance spells out the accumulation-distribution rules. A New Yorker who wants the benefit generally has to change personal domicile or keep income permanently outside New York hands.

The Kaestner Case: The Constitutional Limit

The U.S. Supreme Court set the outer boundary on state power to tax trusts in North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust (2019). In a unanimous opinion by Justice Sotomayor, per McGuireWoods, the Court held that a state cannot tax a trust’s undistributed income based solely on the fact that a beneficiary lives in that state.

The plain-English rule is about fairness, grounded in the Due Process Clause. As The Tax Adviser explains, North Carolina tried to tax a trust only because the beneficiaries lived there, but those beneficiaries had no right to demand the income and were not sure to ever receive it. That thread was too thin to justify the tax.

Kaestner helps the trust strategy but does not guarantee it. The ruling was narrow: it struck down taxation based only on beneficiary residence where receipt was uncertain. It did not bless taxation rules tied to where the grantor lived or where the trust is administered — those remain valid, which is exactly why grantor-based laws like California’s SB 131 survive. The lesson is that Kaestner limits one taxing hook, not all of them.

Three Common Scenarios

These are the three patterns advisors see most often. Each shows the move and what actually happens.

Scenario 1 — California resident funds a NING in 2025

The Move	What Happens
Maria, a California resident, transfers her $5M portfolio to a Nevada incomplete non-grantor trust expecting tax-free accumulation.	SB 131 treats it as a grantor trust; California taxes the income to Maria at up to 13.3%. The strategy fails for state tax.

Scenario 2 — New Jersey resident funds a DING in 2025

The Move	What Happens
David, a New Jersey resident, funds a Delaware incomplete non-grantor trust with a $3M dividend portfolio and accumulates income.	New Jersey may tax based on grantor residency, but constitutional limits after Kaestner and source-income rules can reduce or eliminate the tax — fact-specific, needs counsel.

Scenario 3 — Texas resident “needs” a trust to cut state tax

The Move	What Happens
Priya, a Texas resident, pays a lawyer to build a NING to cut her state income tax on investments.	Texas already has no income tax, so the NING saves nothing on state income tax. She paid setup fees for a benefit she did not need.

Named Examples in Action

James, an actor selling a painting. James lives in a 13.3% state and is about to sell art for a $10,000,000 gain. Sold personally, the state tax alone would be about $1,330,000. A NING illustration from Magnus Financial describes exactly this fact pattern, where tactically gifting the asset to a Nevada non-grantor trust before sale could avoid the state tax — if James’s state has not closed the strategy. Because his state is California, post-2023 the plan fails unless he actually moves.

Susan, an Oregon investor. Susan, in Oregon (top rate 9.9% for 2025), holds a $4,000,000 bond ladder paying $200,000 a year she reinvests. A properly structured WING accumulating that interest could save roughly $19,800 a year in Oregon tax, since Oregon’s trust-residency reach is narrower than California’s. She still files federal Form 1041 and pays federal tax.

Robert, a Florida retiree. Robert moves from New York to Florida and wonders if he still needs his old trust strategy. Because Florida has no income tax, his investment income already escapes state tax. His trust now matters for estate planning and asset protection, not state income tax savings.

Mistakes to Avoid

Assuming your home state allows it. California and New York residents who build an ING get no state income tax benefit and waste $15,000–$30,000+ in setup costs.
Tripping the grantor-trust rules. Keeping too much control makes the trust a grantor trust, so all income flows back to you and the state tax savings vanish.
Completing the gift by accident. Giving up too much control completes the gift, using your lifetime exemption and possibly triggering gift tax reporting on Form 709.
Using a trustee in your home state. A resident trustee can make your high-tax state the trust’s tax home, defeating the entire plan.
Forgetting federal tax still applies. The trust pays federal income tax at compressed brackets, hitting 37% quickly; this is a state-only savings strategy.
Ignoring source income. Income from in-state real estate or an in-state business is usually taxed by that state no matter where the trust lives, so it is not shielded.
Distributing income back to a home-state beneficiary. States like New York tax accumulation distributions to resident beneficiaries, clawing back the deferred tax.
Skipping the IRS private letter ruling. Many advisors get a ruling to confirm non-grantor status; skipping it risks an IRS recharacterization and back taxes plus interest.

Do’s and Don’ts

Do’s

Do confirm your state’s trust-residency rules first — they decide whether the strategy works at all.
Do use an independent, out-of-state trustee so the trust’s tax home is genuinely a no-tax state.
Do choose a true no-income-tax sink state like Nevada, South Dakota, or Wyoming, because situs is what removes the state tax.
Do hire a tax attorney and CPA together, since the gift-tax and income-tax balance is technical and unforgiving.
Do keep the income invested inside the trust to capture the accumulation benefit rather than distributing it home.

Don’ts

Don’t rely on old NING/DING articles written before 2014 (New York) or 2023 (California), because the law moved under them.
Don’t put in-state real estate or business income expecting shelter — source-state tax usually still applies.
Don’t act as your own trustee, because retained control can blow either the non-grantor or incomplete-gift status.
Don’t assume Kaestner protects you fully — it only bars taxation based solely on beneficiary residence.
Don’t build this for a small portfolio, since setup and annual costs can outweigh the tax saved below roughly $1–2 million of income-producing assets.

Pros and Cons

Pros

Real state tax savings for residents of high-tax states that have not closed the strategy, often tens of thousands per year.
Asset protection, because self-settled trusts in states like Nevada shield assets from many creditors.
Estate inclusion by design, so heirs get a stepped-up basis since the incomplete gift keeps assets in your estate.
Retained indirect access through distribution committees, so you have not truly given the money away.
No personal domicile change required in states where it still works — you keep living where you are.

Cons

Closed in major states, so California and New York residents get no income-tax benefit.
High cost and complexity, with setup running into the tens of thousands plus annual trustee and filing fees.
Compressed federal trust brackets, meaning accumulated income hits the 37% federal rate fast.
Audit and recharacterization risk, especially without a private letter ruling.
Ongoing rule risk, since more states may follow California and New York in shutting INGs down.

What to Do Next

Confirm your state’s stance. Check whether your state taxes trusts by grantor residence and whether it has an anti-ING law — start with your state revenue department’s page.
Tally your shieldable income. Add up the interest, dividends, and capital gains you can leave invested; below roughly $1–2 million of assets, the math rarely works.
Interview a tax attorney and a CPA experienced in non-grantor trusts; expect a setup cost in the low five figures and several weeks to draft and fund.
Pick a true no-tax situs and an independent trustee in Nevada, South Dakota, Wyoming, or similar.
Decide on a private letter ruling with your attorney to lock in non-grantor status before you rely on the savings.
File correctly. The trust files Form 1041 by April 15 (or the 15th day of the 4th month after year-end); your gift reporting, if any, goes on Form 709.

Frequently Asked Questions

Can a trust really eliminate my state income tax on investments? Yes, if you live in a high-tax state that still allows it and you use a properly structured non-grantor trust based in a no-income-tax state. For 2025, California and New York residents cannot use this for their own ING trusts.

What is an ING trust? An incomplete gift non-grantor trust. It is funded so the gift is incomplete (saving your estate exemption) but the trust is a separate income taxpayer, letting it accumulate investment income free of state tax in a no-tax state.

Which states have no trust income tax? Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. These states do not tax trust income at all for 2025, which is why ING trusts are typically based in Nevada, South Dakota, or Wyoming.

Does this work for California residents in 2025? No. California’s SB 131, effective retroactive to January 1, 2023, treats ING trusts as grantor trusts, so the income is taxed to the California grantor at up to 13.3% regardless of where the trust sits.

Does this work for New York residents? No. Since 2014, New York treats ING trusts as grantor trusts and also taxes accumulation distributions paid to New York resident beneficiaries, removing the income-tax benefit.

Does the trust still pay federal income tax? Yes. A non-grantor trust files Form 1041 and pays federal income tax on accumulated income, often reaching the top 37% federal rate quickly. The strategy saves state tax only, not federal.

What did the Kaestner case decide? A state cannot tax a trust based solely on a beneficiary’s residence when that beneficiary cannot demand the income and may never receive it. The 2019 Supreme Court ruling was unanimous and rested on due process.

How much can I save? Roughly your state tax rate times your shieldable income. A $250,000 income stream in an 8% state saves about $20,000 a year, and a $2 million California portfolio example showed close to $15,000 in annual savings.

Do I lose access to the money? No, not fully. ING trusts use a distribution committee that can approve payments back to you, so you keep indirect access while the trust holds legal title.

How much does setting up an ING trust cost? Typically low five figures to set up, plus annual trustee and tax-preparation fees. Below roughly $1–2 million of income-producing assets, the costs often outweigh the state tax saved.

Can I be my own trustee? No. Using yourself or a home-state trustee can destroy the non-grantor status or anchor the trust’s tax home in your high-tax state, defeating the plan. Use an independent out-of-state trustee.

Is in-state rental or business income protected? No. Income sourced to a state — like rent from property there or a business operating there — is generally taxed by that state regardless of where the trust is based.

Word count: approximately 2,950 words of body content covering federal baseline, state overlays, the controlling Supreme Court case, worked numeric examples, scenario tables, named examples, mistakes, do’s/don’ts, pros/cons, next steps, and FAQs.

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