On February 15, 2023, FamilyWealthReport quoted Kevin Ghassomian regarding California governor Gavin Newsom’s proposal to impose state income tax on what are called incomplete gift non-grantor (ING) trusts. If enacted, the changes will take effect retroactively from January 1, 2023. Such a move would follow in the footsteps of a similar adjustment made by New York state in 2014.
According to the article, the income of a non-grantor trust is subject to California income tax only if the trust has California source income, a fiduciary residing in California, or a non-contingent California resident beneficiary. Under the proposal, however, any out-of-state ING Trust, for example, one in a state such as Nevada or South Dakota, would be subject to the tax.
“Every trust that is set up has its tax and non-tax features and that is something that is often lost,” said Ghassomian. In almost all cases, trusts are created with a non-tax goal in mind, such as wealth transfer, business succession, and adherence to certain values of a settlor, he said. “I have never had a client set up a trust exclusively for tax purposes.” Though Newsom’s proposal may raise additional revenue, it prevents Californians from having such trusts for non-tax reasons, Ghassomian said.
Private wealth advisors like Ghassomian warn that such moves may accelerate a recent trend of net migration from California to states such as Texas, Florida, Tennessee, and Nevada. By Newsom's own estimates, the damage that such a change would do seems to be out of proportion to the likely amount – only $30 million – of revenue it would raise in 2023, said Ghassomian. “The problem is obvious. The tax on individuals and businesses being driven from California creates a short-term revenue benefit for the state but the long-term consequences will likely be devastating,” he said.